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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Cisco Systems Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Income Statement
- Analysis of Profitability Ratios
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Price to Earnings (P/E) since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Sales (P/S) since 2005
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Balance-Sheet-Based Accruals Ratio
Cisco Systems Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jul 27, 2024 | Jul 29, 2023 | Jul 30, 2022 | Jul 31, 2021 | Jul 25, 2020 | Jul 27, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | |||||||
| Less: Cash and cash equivalents | |||||||
| Less: Investments | |||||||
| Operating assets | |||||||
| Operating Liabilities | |||||||
| Total liabilities | |||||||
| Less: Short-term debt | |||||||
| 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 | |||||||
| Apple Inc. | |||||||
| Arista Networks Inc. | |||||||
| Dell Technologies Inc. | |||||||
| Super Micro Computer Inc. | |||||||
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | |||||||
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | |||||||
Based on: 10-K (reporting date: 2024-07-27), 10-K (reporting date: 2023-07-29), 10-K (reporting date: 2022-07-30), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-25), 10-K (reporting date: 2019-07-27).
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 showed a growth trend from 23,084 million US dollars in 2020 to 30,021 million US dollars in 2022. However, in 2023, a decline to 26,598 million US dollars was observed, followed by a significant increase to 58,565 million US dollars in 2024. This sharp rise in the latest period indicates considerable changes in asset utilization or investment strategies.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited considerable volatility over the analyzed periods. In 2020, the accruals were negative at -1,740 million US dollars, turning positive in 2021 reaching 5,199 million US dollars. The figure slightly decreased but remained positive in 2022 at 1,738 million US dollars. A reversal to negative occurred in 2023 with -3,423 million US dollars, followed by an exceptional increase to 31,967 million US dollars in 2024, indicating substantial fluctuations in accrual accounting components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the behavior of the aggregate accruals but expressed as a percentage relative to net operating assets. It started at -7.26% in 2020, increased dramatically to 20.24% in 2021, and then decreased to 5.96% in 2022. In 2023, it dipped to a negative ratio of -12.09%, followed by a pronounced surge to 75.07% in 2024. Such high variability and the notably elevated ratio in 2024 reflect significant changes in the proportion of accruals relative to operating assets, which may imply shifts in earnings quality or timing of revenue and expense recognition.
Cash-Flow-Statement-Based Accruals Ratio
Cisco Systems Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jul 27, 2024 | Jul 29, 2023 | Jul 30, 2022 | Jul 31, 2021 | Jul 25, 2020 | Jul 27, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income | |||||||
| Less: Net cash provided by operating activities | |||||||
| Less: Net cash (used in) 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 | |||||||
| Apple Inc. | |||||||
| Arista Networks Inc. | |||||||
| Dell Technologies Inc. | |||||||
| Super Micro Computer Inc. | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | |||||||
Based on: 10-K (reporting date: 2024-07-27), 10-K (reporting date: 2023-07-29), 10-K (reporting date: 2022-07-30), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-25), 10-K (reporting date: 2019-07-27).
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 an overall increasing trend over the five-year period. Starting at approximately 23,084 million USD in 2020, the value rose steadily to 28,283 million USD in 2021 and further to 30,021 million USD in 2022. However, there was a slight decline observed in 2023, dropping to 26,598 million USD. This was followed by a significant surge in 2024, reaching 58,565 million USD, which is the highest value recorded during the period. This pattern suggests a considerable expansion in the company's operational asset base in the most recent year.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals demonstrated notable volatility across the years. The figure was negative in 2020 at -7,712 million USD, indicating a potential reduction in accruals or adjustments against cash flows. In 2021, the number sharply shifted to a positive value of 422 million USD, representing a reversal of the prior trend. Subsequently, the accruals reverted back to negative values in 2022 and 2023, at -2,967 million USD and -2,166 million USD respectively. In 2024, the accruals again reversed dramatically, reaching a substantially positive figure of 19,918 million USD. The fluctuations suggest significant changes in the accounting accruals component in relation to the cash flow statement, particularly with the extraordinary jump in 2024.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, closely mirrors the volatility seen in aggregate accruals. Beginning at -32.2% in 2020, the ratio then rose markedly to a positive 1.64% in 2021. This improvement was followed by a decline into negative territory, with -10.18% in 2022 and -7.65% in 2023. The year 2024 again saw a pronounced positive shift to 46.78%, indicating a high proportion of accruals relative to cash flows. This sharp increase in the final period may signal changes in earnings quality or accounting policy impacting the relationship between accruals and cash flows.