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
Dollar Tree Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 21,721,800) | 20,696,000) | 19,574,600) | 13,501,200) | 16,332,800) | 15,701,600) | |
| Less: Cash and cash equivalents | 984,900) | 1,416,700) | 539,200) | 422,100) | 1,097,800) | 866,400) | |
| Less: Short-term investments | —) | —) | —) | —) | —) | 4,000) | |
| Operating assets | 20,736,900) | 19,279,300) | 19,035,400) | 13,079,100) | 15,235,000) | 14,831,200) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,003,300) | 13,410,700) | 13,319,800) | 7,858,300) | 9,150,500) | 10,312,100) | |
| Less: Current portion of long-term debt | —) | —) | 250,000) | —) | 915,900) | 152,100) | |
| Less: Long-term debt, net, excluding current portion | 3,417,000) | 3,226,200) | 3,522,200) | 4,265,300) | 4,762,100) | 6,169,700) | |
| Operating liabilities | 10,586,300) | 10,184,500) | 9,547,600) | 3,593,000) | 3,472,500) | 3,990,300) | |
| Net operating assets1 | 10,150,600) | 9,094,800) | 9,487,800) | 9,486,100) | 11,762,500) | 10,840,900) | |
| Balance-sheet-based aggregate accruals2 | 1,055,800) | (393,000) | 1,700) | (2,276,400) | 921,600) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 10.97% | -4.23% | 0.02% | -21.43% | 8.15% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Costco Wholesale Corp. | 20.71% | 5.32% | — | — | — | — | |
| Target Corp. | 10.33% | — | — | — | — | — | |
| Walmart Inc. | 1.09% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 4.30% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 7.61% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 20,736,900 – 10,586,300 = 10,150,600
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,150,600 – 9,094,800 = 1,055,800
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,055,800 ÷ [(10,150,600 + 9,094,800) ÷ 2] = 10.97%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit a fluctuating trend over the reviewed periods. Beginning at approximately $11.76 billion in early 2018, the figure declined noticeably to about $9.49 billion in early 2019 and remained relatively stable through 2020 and early 2021, with minor decreases. However, there was a rebound to approximately $10.15 billion in early 2022, indicating some recovery or reinvestment in operating assets.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals show considerable volatility during the periods. Starting with a positive $921.6 million in 2018, it drastically shifted to a negative $2.28 billion in 2019, suggesting a significant reduction in accrued liabilities or changes in working capital components. This was followed by stabilization near zero in 2020, a negative $393 million in 2021, and a return to a positive figure of approximately $1.06 billion in 2022. These fluctuations indicate inconsistency in accrual accounting components over time.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, representing accruals relative to net operating assets, reflects the volatility observed in aggregate accruals. It begins at 8.15% in 2018, plunges to -21.43% in 2019, indicating a substantial negative accrual impact compared to operating assets, then hovers near zero at 0.02% in 2020. The ratio falls again to -4.23% in 2021, followed by a sharp increase to 10.97% in 2022. This pattern suggests an erratic accrual profile that could affect financial reporting quality and requires monitoring for potential earnings management or operational inconsistencies.
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Cash-Flow-Statement-Based Accruals Ratio
Dollar Tree Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | 1,327,900) | 1,341,900) | 827,000) | (1,590,800) | 1,714,300) | 896,200) | |
| Less: Net cash provided by operating activities | 1,431,500) | 2,716,300) | 1,869,800) | 1,766,000) | 1,510,200) | 1,673,300) | |
| Less: Net cash used in investing activities | (1,019,900) | (889,700) | (1,020,200) | (816,700) | (627,900) | (483,600) | |
| Cash-flow-statement-based aggregate accruals | 916,300) | (484,700) | (22,600) | (2,540,100) | 832,000) | (293,500) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 9.52% | -5.22% | -0.24% | -23.91% | 7.36% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Costco Wholesale Corp. | 14.69% | -2.96% | — | — | — | — | |
| Target Corp. | 7.52% | — | — | — | — | — | |
| Walmart Inc. | -3.77% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | -0.42% | -21.72% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 4.81% | -9.79% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 916,300 ÷ [(10,150,600 + 9,094,800) ÷ 2] = 9.52%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets display a decreasing trend from February 3, 2018, through January 30, 2021, dropping from 11,762,500 to 9,094,800 US dollars in thousands. This represents a substantial reduction in net operating assets over this period. However, in the last reported period, January 29, 2022, there is a reversal with an increase to 10,150,600, indicating a partial recovery but still below the initial 2018 level.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals show significant fluctuations across the five periods. Initially, there is a positive accrual of 832,000 US dollars in thousands in 2018, followed by a sharp decline to -2,540,100 in 2019. After this steep negative spike, the accrual values stabilize closer to zero in 2020 (-22,600) and 2021 (-484,700), before increasing again to a positive 916,300 in 2022. This pattern suggests considerable variability in accruals with a negative peak in 2019 and a recovery to positive figures by 2022.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the pattern observed in aggregate accruals. It starts at a moderate positive level of 7.36% in 2018, then plunges to a negative 23.91% in 2019, indicating significant negative accrual activity relative to net operating assets. The ratio approaches zero in 2020 at -0.24%, indicating stabilization, but drops again to -5.22% in 2021. In 2022, the ratio rebounds to a positive 9.52%, reflecting improved accrual quality or operational adjustments positively affecting the accruals relative to net operating assets.
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