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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Balance-Sheet-Based Accruals Ratio
Amazon.com Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of lease liabilities, finance leases | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term lease liabilities, finance leases, excluding current portion | ||||||
| Less: Long-term 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 | ||||||
| Home Depot Inc. | ||||||
| Lowe’s Cos. Inc. | ||||||
| TJX Cos. Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 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.
The balance-sheet-based accruals ratio exhibits a fluctuating pattern over the observed period. Initially, the ratio decreases significantly before increasing again, ultimately reaching its highest point in the final year. This suggests a dynamic relationship between net operating assets and aggregate accruals.
- Net Operating Assets
- Net operating assets demonstrate a consistent upward trend throughout the period, increasing from 161,949 US$ millions in 2022 to 368,718 US$ millions in 2025. This indicates sustained growth in the company’s operational investments and resources.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals also increase over the period, but not consistently. After a decrease from 45,765 US$ millions in 2022 to 32,063 US$ millions in 2023, accruals rise to 58,998 US$ millions in 2024 and further to 115,708 US$ millions in 2025. This suggests a potential shift in the timing of revenue and expense recognition, or changes in working capital management, particularly in the later years.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio begins at 32.91% in 2022, then declines substantially to 18.01% in 2023. A subsequent increase is observed, with the ratio reaching 26.40% in 2024 and peaking at 37.22% in 2025. The initial decrease may indicate improved earnings quality through reduced reliance on accruals, while the later increases could signal a greater dependence on accruals relative to net operating assets. The significant rise in the final year warrants further investigation to determine the underlying drivers and potential implications for financial reporting quality.
The increasing accruals ratio in the later years, coupled with the growth in both net operating assets and aggregate accruals, suggests a potential need for closer scrutiny of the company’s accounting practices and the sustainability of its reported earnings. Further analysis, including cash flow statement review and industry comparisons, would be beneficial to provide a more comprehensive assessment.
Cash-Flow-Statement-Based Accruals Ratio
Amazon.com Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Home Depot Inc. | ||||||
| Lowe’s Cos. Inc. | ||||||
| TJX Cos. Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 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.
The analysis reveals a notable shift in cash-flow-statement-based accruals over the four-year period. Net operating assets demonstrate consistent growth, while the cash-flow-statement-based aggregate accruals and accruals ratio exhibit a dynamic pattern.
- Net Operating Assets
- Net operating assets increased steadily throughout the period, moving from US$161,949 million in 2022 to US$368,718 million in 2025. This indicates consistent expansion of the company’s operational footprint and investment in assets.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals were negative in 2022 and 2023, registering at -US$11,873 million and -US$4,688 million respectively. This suggests that, during these years, the company’s reported earnings were higher than its actual cash flows from operations. However, a significant positive shift occurred in 2024, with accruals reaching US$37,713 million, and continued to rise to US$80,701 million in 2025. This indicates a growing divergence between reported earnings and cash flows, potentially due to increased reliance on non-cash accounting practices or changes in working capital management.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio mirrored the trend in aggregate accruals. It was -8.54% in 2022 and -2.63% in 2023, reflecting the negative accruals. A substantial increase is observed in 2024, with the ratio reaching 16.87%, and further increasing to 25.96% in 2025. This escalating ratio suggests a growing proportion of reported earnings are attributable to accruals rather than actual cash inflows. A consistently increasing accruals ratio warrants further investigation to assess the sustainability of earnings and potential risks related to earnings quality.
In summary, while net operating assets demonstrate healthy growth, the increasing positive trend in cash-flow-statement-based accruals and the corresponding accruals ratio suggest a potential shift in the relationship between reported earnings and underlying cash flows. This trend merits further scrutiny to understand the drivers behind the changes and assess any implications for the company’s financial reporting quality.