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
Kraft Foods Group Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | ||
|---|---|---|---|---|
| Operating Assets | ||||
| Total assets | 22,947) | 23,148) | 23,329) | |
| Less: Cash and cash equivalents | 1,293) | 1,686) | 1,255) | |
| Operating assets | 21,654) | 21,462) | 22,074) | |
| Operating Liabilities | ||||
| Total liabilities | 18,582) | 17,961) | 19,757) | |
| Less: Current portion of long-term debt | 1,405) | 4) | 5) | |
| Less: Long-term debt, excluding current portion | 8,627) | 9,976) | 9,966) | |
| Operating liabilities | 8,550) | 7,981) | 9,786) | |
| Net operating assets1 | 13,104) | 13,481) | 12,288) | |
| Balance-sheet-based aggregate accruals2 | (377) | 1,193) | —) | |
| Financial Ratio | ||||
| Balance-sheet-based accruals ratio3 | -2.84% | 9.26% | — | |
| Benchmarks | ||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||
| lululemon athletica inc. | — | — | — | |
| Nike Inc. | — | — | — | |
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 2014 Calculation
Net operating assets = Operating assets – Operating liabilities
= 21,654 – 8,550 = 13,104
2 2014 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2014 – Net operating assets2013
= 13,104 – 13,481 = -377
3 2014 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -377 ÷ [(13,104 + 13,481) ÷ 2] = -2.84%
4 Click competitor name to see calculations.
An analysis of the financial reporting quality metrics reveals a significant shift in the relationship between reported earnings and cash flows between the fiscal years ending December 28, 2013, and December 27, 2014.
- Net Operating Assets
- Net operating assets experienced a slight contraction, decreasing from 13,481 million US dollars in 2013 to 13,104 million US dollars in 2014. This indicates a relatively stable asset base over the two-year period, suggesting that the volatility observed in accruals was not driven by large-scale changes in the underlying operating asset structure.
- Balance-Sheet-Based Aggregate Accruals
- A substantial reversal is observed in aggregate accruals, which transitioned from a positive 1,193 million US dollars in 2013 to a negative 377 million US dollars in 2014. This pivot suggests a transition from a period where reported earnings exceeded cash flows to a period where cash flows surpassed reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects this reversal, dropping from 9.26% in 2013 to -2.84% in 2014. From a financial reporting quality perspective, the high positive ratio in 2013 may indicate a higher reliance on non-cash earnings. Conversely, the shift to a negative ratio in 2014 typically signals more conservative reporting and higher earnings quality, as the reported net income is backed by a stronger cash flow component relative to operating assets.
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Cash-Flow-Statement-Based Accruals Ratio
Kraft Foods Group Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 27, 2014 | Dec 28, 2013 | Dec 29, 2012 | ||
|---|---|---|---|---|
| Net earnings | 1,043) | 2,715) | 1,642) | |
| Less: Net cash provided by operating activities | 2,020) | 2,043) | 3,035) | |
| Less: Net cash used in investing activities | (535) | (426) | (422) | |
| Cash-flow-statement-based aggregate accruals | (442) | 1,098) | (971) | |
| Financial Ratio | ||||
| Cash-flow-statement-based accruals ratio1 | -3.33% | 8.52% | — | |
| Benchmarks | ||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||
| lululemon athletica inc. | — | — | — | |
| Nike Inc. | — | — | — | |
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 2014 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -442 ÷ [(13,104 + 13,481) ÷ 2] = -3.33%
2 Click competitor name to see calculations.
The financial data indicates a significant reversal in the company's accruals position between the fiscal years ending December 28, 2013, and December 27, 2014, reflecting a notable shift in the relationship between reported earnings and actual cash flows.
- Net Operating Assets
- Net operating assets experienced a slight contraction, decreasing from US$ 13,481 million in 2013 to US$ 13,104 million in 2014. This marginal decline suggests a relatively stable operating asset base over the two-year period.
- Cash-flow-statement-based Aggregate Accruals
- A substantial transition is observed in aggregate accruals, which moved from a positive US$ 1,098 million in 2013 to a negative US$ 442 million in 2014. The swing from a positive to a negative value indicates that whereas earnings exceeded cash flows in the first period, the reverse occurred in the second period.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio demonstrates a sharp decline from 8.52% in 2013 to -3.33% in 2014. In financial analysis, a high positive accruals ratio can indicate that reported earnings are not well-supported by cash flows, potentially lowering the quality of earnings. The transition to a negative ratio suggests that cash flows have surpassed accrual-based earnings, which is typically viewed as an indicator of higher earnings quality and a reduced reliance on non-cash accounting adjustments.
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