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
Keurig Dr Pepper Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|
| Operating Assets | |||||
| Total assets | 50,598) | 49,779) | 49,518) | 48,918) | |
| Less: Cash and cash equivalents | 567) | 240) | 75) | 83) | |
| Less: Restricted cash and restricted cash equivalents | 1) | 15) | 26) | 46) | |
| Operating assets | 50,030) | 49,524) | 49,417) | 48,789) | |
| Operating Liabilities | |||||
| Total liabilities | 25,626) | 25,949) | 26,261) | 26,385) | |
| Less: Short-term borrowings and current portion of long-term obligations | 304) | 2,345) | 1,593) | 1,458) | |
| Less: Current finance lease liability | 79) | 44) | 41) | 26) | |
| Less: Long-term obligations, excluding current portion | 11,578) | 11,143) | 12,827) | 14,201) | |
| Less: Non-current finance lease liability | 621) | 298) | 269) | 305) | |
| Operating liabilities | 13,044) | 12,119) | 11,531) | 10,395) | |
| Net operating assets1 | 36,986) | 37,405) | 37,886) | 38,394) | |
| Balance-sheet-based aggregate accruals2 | (419) | (481) | (508) | —) | |
| Financial Ratio | |||||
| Balance-sheet-based accruals ratio3 | -1.13% | -1.28% | -1.33% | — | |
| Benchmarks | |||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||
| Coca-Cola Co. | 3.39% | — | — | — | |
| Mondelēz International Inc. | 0.47% | — | — | — | |
| PepsiCo Inc. | 4.76% | — | — | — | |
| Philip Morris International Inc. | 10.28% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||
| Food, Beverage & Tobacco | 3.62% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||
| Consumer Staples | -0.13% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 50,030 – 13,044 = 36,986
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 36,986 – 37,405 = -419
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -419 ÷ [(36,986 + 37,405) ÷ 2] = -1.13%
4 Click competitor name to see calculations.
The financial data over the three-year period indicate several noteworthy trends regarding operating assets and accrual measures.
- Net Operating Assets
- The net operating assets demonstrate a gradual decline, moving from approximately 37.9 billion USD at the end of 2019 to around 37.4 billion USD at the end of 2020, and further decreasing to about 37.0 billion USD by the conclusion of 2021. This steady reduction suggests a slight contraction in the company's operating asset base over the observed time frame.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals, measured in millions of USD, also exhibit a trend of decreasing magnitude but move towards less negative values, indicating a reduction in the absolute size of negative accruals. The figures move from -508 million USD in 2019 to -481 million USD in 2020, and then to -419 million USD in 2021. This pattern suggests that while the company continues to report negative accruals, the extent of these accruals is diminishing over time.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, aligns with the aforementioned trends. Starting at -1.33% in 2019, it improves marginally to -1.28% in 2020 and further to -1.13% in 2021. The reduction in the absolute value of this ratio implies a gradual enhancement in the quality of earnings, as the relative size of accruals to operating assets is shrinking.
In summary, the data reflect a consistent decrease in net operating assets alongside a steady reduction in both the magnitude and ratio of balance-sheet-based accruals. These trends may point to improving earnings quality through lower accrual-related adjustments, albeit accompanied by a slight decline in the operating asset base.
Cash-Flow-Statement-Based Accruals Ratio
Keurig Dr Pepper Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|
| Net income attributable to KDP | 2,146) | 1,325) | 1,254) | 586) | |
| Less: Net cash provided by operating activities | 2,874) | 2,456) | 2,474) | 1,613) | |
| Less: Net cash (used in) provided by investing activities | 210) | (316) | (150) | (19,131) | |
| Cash-flow-statement-based aggregate accruals | (938) | (815) | (1,070) | 18,104) | |
| Financial Ratio | |||||
| Cash-flow-statement-based accruals ratio1 | -2.52% | -2.16% | -2.81% | — | |
| Benchmarks | |||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||
| Coca-Cola Co. | -0.16% | — | — | — | |
| Mondelēz International Inc. | 0.42% | — | — | — | |
| PepsiCo Inc. | -1.48% | — | — | — | |
| Philip Morris International Inc. | -3.48% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||
| Food, Beverage & Tobacco | -0.70% | 7.54% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||
| Consumer Staples | -4.89% | -2.34% | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -938 ÷ [(36,986 + 37,405) ÷ 2] = -2.52%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets exhibit a gradual decline over the three-year period, decreasing from 37,886 million USD at the end of 2019 to 36,986 million USD by the end of 2021. This represents a modest reduction, indicating a slight contraction in the net operating asset base over time.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals based on the cash flow statement have fluctuated within a negative range over the observed years. Starting at -1,070 million USD at the end of 2019, the figure improved to -815 million USD in 2020 before worsening again to -938 million USD in 2021. This pattern suggests volatility in the accrual component of operating cash flows but consistently negative accruals.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, expressed as a percentage, follows a similar trend to the aggregate accruals. It decreased from -2.81% in 2019 to -2.16% in 2020, indicating a moderation of the accruals relative to total assets or cash flows, then increased again to -2.52% in 2021. Despite the fluctuation, the ratio remains consistently negative, which could reflect a persistent cash flow impact from accrual accounting measures.