Financial Reporting Quality: Aggregate Accruals
Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.
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- Income Statement
- Balance Sheet: Liabilities and Stockholders’ Equity
- Cash Flow Statement
- Common-Size Balance Sheet: Assets
- Analysis of Profitability Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Net Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Adobe Inc., balance sheet computation of aggregate accruals
US$ in millions
| Nov 29, 2024 | Dec 1, 2023 | Dec 2, 2022 | Dec 3, 2021 | Nov 27, 2020 | Nov 29, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | |||||||
| Less: Cash and cash equivalents | |||||||
| Less: Short-term investments | |||||||
| Operating assets | |||||||
| Operating Liabilities | |||||||
| Total liabilities | |||||||
| Less: Debt, current portion | |||||||
| Less: Debt, excluding current portion | |||||||
| Operating liabilities | |||||||
| Net operating assets1 | |||||||
| Balance-sheet-based aggregate accruals2 | |||||||
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | |||||||
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | |||||||
| Cadence Design Systems Inc. | |||||||
| CrowdStrike Holdings Inc. | |||||||
| Fair Isaac Corp. | |||||||
| International Business Machines Corp. | |||||||
| Intuit Inc. | |||||||
| Microsoft Corp. | |||||||
| Oracle Corp. | |||||||
| Palantir Technologies Inc. | |||||||
| Palo Alto Networks Inc. | |||||||
| Salesforce Inc. | |||||||
| ServiceNow Inc. | |||||||
| Synopsys Inc. | |||||||
| Workday Inc. | |||||||
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | |||||||
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | |||||||
Based on: 10-K (reporting date: 2024-11-29), 10-K (reporting date: 2023-12-01), 10-K (reporting date: 2022-12-02), 10-K (reporting date: 2021-12-03), 10-K (reporting date: 2020-11-27), 10-K (reporting date: 2019-11-29).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited fluctuation over the observed periods. Beginning at 11,389 million US dollars, the figure increased significantly to 13,122 million in the following year. Subsequently, it declined to 12,084 million, followed by a slight rise to 12,310 million, and then decreased again to 11,847 million. Overall, this represents a peak in 2021 and a general decreasing trend thereafter, suggesting a variability in the investment in operating assets.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals displayed considerable volatility and a shift between positive and negative values. Starting at 898 million US dollars, the accruals nearly doubled in 2021 to 1,733 million, then sharply reversed to a negative 1,038 million in 2022. The value rebounded to a modest positive 226 million in 2023, followed by another decline into negative territory at -463 million in 2024. This erratic pattern indicates fluctuating timing differences between accounting earnings and cash flows.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the aggregate accruals' volatility, presenting substantial swings across the periods. Starting at 8.2% in 2020, the ratio increased markedly to 14.14% in 2021. It then dropped sharply to -8.24% in 2022, followed by a return to a modest positive 1.85% in 2023, before decreasing again to -3.83% in 2024. These substantial oscillations suggest variations in earnings quality and potential changes in the recognition or timing of revenues and expenses relative to net operating assets.
Cash-Flow-Statement-Based Accruals Ratio
Adobe Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Nov 29, 2024 | Dec 1, 2023 | Dec 2, 2022 | Dec 3, 2021 | Nov 27, 2020 | Nov 29, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income | |||||||
| Less: Net cash provided by operating activities | |||||||
| Less: Net cash (used for) provided by investing activities | |||||||
| Cash-flow-statement-based aggregate accruals | |||||||
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | |||||||
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | |||||||
| Cadence Design Systems Inc. | |||||||
| CrowdStrike Holdings Inc. | |||||||
| Fair Isaac Corp. | |||||||
| International Business Machines Corp. | |||||||
| Intuit Inc. | |||||||
| Microsoft Corp. | |||||||
| Oracle Corp. | |||||||
| Palantir Technologies Inc. | |||||||
| Palo Alto Networks Inc. | |||||||
| Salesforce Inc. | |||||||
| ServiceNow Inc. | |||||||
| Synopsys Inc. | |||||||
| Workday Inc. | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | |||||||
Based on: 10-K (reporting date: 2024-11-29), 10-K (reporting date: 2023-12-01), 10-K (reporting date: 2022-12-02), 10-K (reporting date: 2021-12-03), 10-K (reporting date: 2020-11-27), 10-K (reporting date: 2019-11-29).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a general increase from 11,389 million US dollars in late 2020 to a peak of 13,122 million US dollars in late 2021. Subsequently, a declining trend occurred, with values decreasing to 12,084 million in late 2022, slightly rising to 12,310 million in late 2023, and then dropping again to 11,847 million in late 2024. This pattern indicates a peak in 2021 followed by a gradual reduction in net operating assets over the ensuing three years.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals showed substantial volatility over the examined periods. Starting at a negative value of -53 million US dollars in 2020, the figure surged to a positive 1,129 million by 2021, marking a significant one-year increase. However, from 2021 onward, there was a sharp reversal with aggregate accruals turning notably negative and continuing to decrease consistently: -2,512 million in 2022, -2,650 million in 2023, and a comparable -2,645 million in 2024. This shift from positive to strongly negative accruals suggests increasing adjustments in the cash-flow statement-based accruals over time.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio percentage further reflects the fluctuations seen in aggregate accruals. Initially, it was marginally negative at -0.48% in 2020, then rose sharply to 9.21% in 2021, consistent with the positive movement in aggregate accruals. From 2021 forward, the ratio turned markedly negative and remained relatively stable at significantly negative levels: -19.93% in 2022, -21.73% in 2023, and -21.9% in 2024. This continued negative ratio indicates deteriorating quality in accruals with respect to cash flow in the later years.