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.
Balance-Sheet-Based Accruals Ratio
Costco Wholesale Corp., balance sheet computation of aggregate accruals
US$ in millions
| Sep 1, 2024 | Sep 3, 2023 | Aug 28, 2022 | Aug 29, 2021 | Aug 30, 2020 | Sep 1, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 69,831) | 68,994) | 64,166) | 59,268) | 55,556) | 45,400) | |
| Less: Cash and cash equivalents | 9,906) | 13,700) | 10,203) | 11,258) | 12,277) | 8,384) | |
| Less: Short-term investments | 1,238) | 1,534) | 846) | 917) | 1,028) | 1,060) | |
| Operating assets | 58,687) | 53,760) | 53,117) | 47,093) | 42,251) | 35,956) | |
| Operating Liabilities | |||||||
| Total liabilities | 46,209) | 43,936) | 43,519) | 41,190) | 36,851) | 29,816) | |
| Less: Current portion of long-term debt | 103) | 1,081) | 73) | 799) | 95) | 1,699) | |
| Less: Current finance lease liabilities | 147) | 129) | 245) | 72) | 31) | 26) | |
| Less: Long-term debt, excluding current portion | 5,794) | 5,377) | 6,484) | 6,692) | 7,514) | 5,124) | |
| Less: Long-term finance lease liabilities | 1,351) | 1,303) | 1,383) | 980) | 657) | 395) | |
| Operating liabilities | 38,814) | 36,046) | 35,334) | 32,647) | 28,554) | 22,572) | |
| Net operating assets1 | 19,873) | 17,714) | 17,783) | 14,446) | 13,697) | 13,384) | |
| Balance-sheet-based aggregate accruals2 | 2,159) | (69) | 3,337) | 749) | 313) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 11.49% | -0.39% | 20.71% | 5.32% | 2.31% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Target Corp. | 2.06% | 19.69% | 10.33% | -10.90% | — | — | |
| Walmart Inc. | 6.15% | 0.02% | 1.09% | -6.44% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 6.12% | 2.78% | 4.30% | -5.94% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 1.15% | 2.58% | 7.61% | -0.13% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-09-01), 10-K (reporting date: 2023-09-03), 10-K (reporting date: 2022-08-28), 10-K (reporting date: 2021-08-29), 10-K (reporting date: 2020-08-30), 10-K (reporting date: 2019-09-01).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 58,687 – 38,814 = 19,873
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 19,873 – 17,714 = 2,159
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,159 ÷ [(19,873 + 17,714) ÷ 2] = 11.49%
4 Click competitor name to see calculations.
The data presents an analysis of certain financial quality measures over a five-year period. The focus is on net operating assets, balance-sheet-based aggregate accruals in millions of US dollars, and the corresponding accruals ratio expressed as a percentage.
- Net Operating Assets
- There is a general upward trend in net operating assets, increasing from 13,697 million US dollars in 2020 to 19,873 million US dollars in 2024. The increase is relatively steady, with a slight plateau between 2022 (17,783 million) and 2023 (17,714 million), before rising again in 2024.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals display notable volatility across the years. Starting at 313 million US dollars in 2020, the value sharply increased to 749 million in 2021 and surged significantly to 3,337 million in 2022. In 2023, there is a pronounced reversal to a negative value of -69 million, followed by another substantial increase to 2,159 million in 2024. This pattern suggests fluctuations in accrual accounting components that may reflect episodic changes in operational or accounting practices.
- Balance-sheet-based Accruals Ratio
- The accruals ratio aligns with the changes in aggregate accruals, showing a general upward movement from 2.31% in 2020 to a peak of 20.71% in 2022, indicating greater accrual activity relative to net operating assets. In 2023, the ratio turned slightly negative (-0.39%), reflecting the negative aggregate accruals noted that year. In 2024, the ratio rebounds to 11.49%, suggesting renewed accruals activity though not reaching the previous high of 2022.
Overall, the data indicates increasing net operating assets over the period accompanied by substantial variability in accrual components. The fluctuations in the accruals figures and their relative proportion to net operating assets could signal changes in earnings quality or timing of revenue and expense recognition, warranting further investigation into underlying operational or accounting factors driving these patterns.
Cash-Flow-Statement-Based Accruals Ratio
Costco Wholesale Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Sep 1, 2024 | Sep 3, 2023 | Aug 28, 2022 | Aug 29, 2021 | Aug 30, 2020 | Sep 1, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to Costco | 7,367) | 6,292) | 5,844) | 5,007) | 4,002) | 3,659) | |
| Less: Net cash provided by operating activities | 11,339) | 11,068) | 7,392) | 8,958) | 8,861) | 6,356) | |
| Less: Net cash used in investing activities | (4,409) | (4,972) | (3,915) | (3,535) | (3,891) | (2,865) | |
| Cash-flow-statement-based aggregate accruals | 437) | 196) | 2,367) | (416) | (968) | 168) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 2.33% | 1.10% | 14.69% | -2.96% | -7.15% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Target Corp. | 1.09% | 18.64% | 7.52% | -18.12% | — | — | |
| Walmart Inc. | 0.87% | 0.47% | -3.77% | -10.19% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 1.06% | 3.13% | -0.42% | -10.54% | -3.84% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | -0.17% | 2.27% | 4.81% | -4.89% | -2.34% | — | |
Based on: 10-K (reporting date: 2024-09-01), 10-K (reporting date: 2023-09-03), 10-K (reporting date: 2022-08-28), 10-K (reporting date: 2021-08-29), 10-K (reporting date: 2020-08-30), 10-K (reporting date: 2019-09-01).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 437 ÷ [(19,873 + 17,714) ÷ 2] = 2.33%
2 Click competitor name to see calculations.
The financial data for the analyzed periods reveals several noteworthy trends in the quality of annual financial reporting.
- Net Operating Assets
- There is a consistent upward trend in net operating assets from 13,697 million US dollars in 2020 to 19,873 million US dollars in 2024. This represents a substantial increase over the five-year period, indicating an expansion in the company’s operational investment base.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals present more variability. Initially, these values are negative (-968 million in 2020 and -416 million in 2021), suggesting a cash flow position exceeding accounting earnings during these years. A significant shift occurs in 2022, when accruals sharply increase to a positive 2,367 million, which then sharply drops back to lower positive values of 196 million and 437 million in 2023 and 2024, respectively. This fluctuation may indicate changes in working capital management, revenue recognition, or expense deferrals affecting reported earnings.
- Cash-flow-statement-based Accruals Ratio
- Mirroring the pattern of aggregate accruals, the accruals ratio starts at a negative level, -7.15% in 2020, improving to -2.96% in 2021, then jumps significantly to a positive 14.69% in 2022. Subsequently, it declines to modest positive values of 1.1% and 2.33% in 2023 and 2024 respectively. The large positive spike in 2022 suggests an anomalous year where accrual accounting earnings considerably exceeded cash-based earnings. The follow-up years show a normalization to lower positive ratios, implying relatively stable, but still positive, accruals which may warrant further examination.
Overall, the data indicate growth in operating assets, while accrual-based measures fluctuate considerably, especially in 2022. These patterns point to variations in accrual quality and underlying accounting practices that impact the relationship between reported earnings and cash flows. The sharp increase and subsequent moderation in accruals could have implications for assessing earnings quality and the sustainability of reported profits during these periods.