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
Palo Alto Networks Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jul 31, 2026 | Jul 31, 2025 | Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 48,460) | 23,576) | 19,991) | 14,501) | 12,254) | 10,242) | |
| Less: Cash and cash equivalents | 2,514) | 2,269) | 1,535) | 1,135) | 2,119) | 1,874) | |
| Less: Short-term investments | 557) | 635) | 1,044) | 1,255) | 1,516) | 1,027) | |
| Operating assets | 45,389) | 20,673) | 17,412) | 12,111) | 8,619) | 7,341) | |
| Operating Liabilities | |||||||
| Total liabilities | 20,968) | 15,752) | 14,821) | 12,753) | 12,044) | 9,478) | |
| Less: Short-term convertible senior notes | —) | —) | 964) | 1,992) | 3,677) | 1,558) | |
| Less: Long-term convertible senior notes | 1,774) | —) | —) | —) | —) | 1,668) | |
| Operating liabilities | 19,194) | 15,752) | 13,857) | 10,761) | 8,367) | 6,252) | |
| Net operating assets1 | 26,195) | 4,921) | 3,555) | 1,350) | 252) | 1,089) | |
| Balance-sheet-based aggregate accruals2 | 21,274) | 1,366) | 2,205) | 1,098) | (836) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 136.74% | 32.24% | 89.91% | 137.01% | -124.73% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | — | 2.83% | 35.69% | 16.32% | 21.70% | 27.93% | |
| Adobe Inc. | — | -5.28% | -3.83% | 1.85% | -8.24% | 14.14% | |
| AppLovin Corp. | — | -20.02% | -0.63% | -1.52% | 36.28% | — | |
| Cadence Design Systems Inc. | — | 9.47% | 39.84% | 11.17% | 26.65% | — | |
| Datadog Inc. | — | 53.88% | -28.51% | -35.73% | 17.56% | — | |
| International Business Machines Corp. | — | 16.28% | 2.79% | 2.42% | 1.55% | — | |
| Intuit Inc. | -8.23% | 3.52% | 3.35% | -1.74% | 85.68% | — | |
| Microsoft Corp. | 33.11% | 21.81% | 52.18% | 22.96% | 42.27% | — | |
| Oracle Corp. | 34.01% | 20.79% | 4.30% | 51.77% | 9.90% | — | |
| Palantir Technologies Inc. | — | 509.21% | — | — | — | — | |
| Salesforce Inc. | 13.74% | 0.71% | -2.46% | -2.30% | 57.74% | — | |
| ServiceNow Inc. | — | 41.98% | 22.91% | 61.79% | 12.89% | — | |
| Synopsys Inc. | — | 154.48% | 7.85% | 13.85% | 5.01% | 0.36% | |
| Workday Inc. | 28.83% | 20.74% | 28.44% | -11.24% | 55.93% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 0.00% | 21.91% | 26.12% | 18.31% | 29.53% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 0.00% | 14.20% | 20.88% | 8.81% | 19.09% | — | |
Based on: 10-K (reporting date: 2026-07-31), 10-K (reporting date: 2025-07-31), 10-K (reporting date: 2024-07-31), 10-K (reporting date: 2023-07-31), 10-K (reporting date: 2022-07-31), 10-K (reporting date: 2021-07-31).
1 2026 Calculation
Net operating assets = Operating assets – Operating liabilities
= 45,389 – 19,194 = 26,195
2 2026 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2026 – Net operating assets2025
= 26,195 – 4,921 = 21,274
3 2026 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 21,274 ÷ [(26,195 + 4,921) ÷ 2] = 136.74%
4 Click competitor name to see calculations.
The financial data exhibits significant volatility and an aggressive growth trajectory in balance sheet components between 2022 and 2026, specifically regarding operating assets and the resulting accruals.
- Net Operating Assets
- A consistent and accelerating increase in net operating assets is evident, rising from US$ 252 million in 2022 to US$ 26,195 million by 2026. The most substantial expansion occurs in the final period, where assets increased by more than fivefold compared to the preceding year.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals transitioned from a negative position of US$ -836 million in 2022 to a substantial positive balance of US$ 21,274 million in 2026. Following a period of growth through 2024, a temporary contraction was observed in 2025 before the significant spike in the final year.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio demonstrates extreme variance over the five-year period. After starting at -124.73% in 2022, the ratio peaked at 137.01% in 2023 and subsequently declined steadily to 32.24% by 2025. This downward trend was reversed in 2026, with the ratio returning to a high of 136.74%.
The strong correlation between the surge in net operating assets and the sharp increase in the accruals ratio in 2026 indicates a significant shift in the balance sheet structure. The high positive accruals ratio in the final period suggests a substantial divergence between reported accounting earnings and cash flow, which typically signals a decrease in financial reporting quality or the impact of significant non-cash asset acquisitions.
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Cash-Flow-Statement-Based Accruals Ratio
Palo Alto Networks Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jul 31, 2026 | Jul 31, 2025 | Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | 307) | 1,134) | 2,578) | 440) | (267) | (499) | |
| Less: Net cash provided by operating activities | 4,553) | 3,716) | 3,258) | 2,778) | 1,985) | 1,503) | |
| Less: Net cash used in investing activities | (3,104) | (2,205) | (1,510) | (2,034) | (933) | (1,481) | |
| Cash-flow-statement-based aggregate accruals | (1,142) | (377) | 830) | (304) | (1,318) | (521) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -7.34% | -8.91% | 33.84% | -37.95% | -196.64% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | — | -6.95% | 24.31% | -0.19% | 11.87% | 11.80% | |
| Adobe Inc. | — | -14.85% | -21.90% | -21.73% | -19.93% | 9.21% | |
| AppLovin Corp. | — | -27.29% | -10.24% | -15.40% | 22.07% | — | |
| Cadence Design Systems Inc. | — | -3.48% | 17.36% | 3.78% | 15.03% | — | |
| Datadog Inc. | — | 206.67% | 30.92% | 53.36% | -34.44% | — | |
| International Business Machines Corp. | — | 10.47% | -3.73% | 0.99% | -7.22% | — | |
| Intuit Inc. | -14.09% | -0.10% | -8.44% | -8.74% | 25.60% | — | |
| Microsoft Corp. | 22.28% | 12.55% | 30.89% | 5.22% | 13.42% | — | |
| Oracle Corp. | 29.14% | 13.98% | -1.01% | 42.79% | -30.58% | — | |
| Palantir Technologies Inc. | — | 2,593.23% | — | — | — | — | |
| Salesforce Inc. | 1.74% | -6.66% | -8.44% | -8.49% | 21.96% | — | |
| ServiceNow Inc. | — | -29.72% | -7.12% | 15.44% | 8.80% | — | |
| Synopsys Inc. | — | 71.60% | -7.64% | 0.20% | -4.64% | -4.88% | |
| Workday Inc. | -55.17% | -4.25% | 34.56% | 18.64% | -0.65% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 0.00% | 10.54% | 12.11% | 7.33% | 2.29% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 0.00% | 5.89% | 5.99% | 1.37% | 3.25% | — | |
Based on: 10-K (reporting date: 2026-07-31), 10-K (reporting date: 2025-07-31), 10-K (reporting date: 2024-07-31), 10-K (reporting date: 2023-07-31), 10-K (reporting date: 2022-07-31), 10-K (reporting date: 2021-07-31).
1 2026 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,142 ÷ [(26,195 + 4,921) ÷ 2] = -7.34%
2 Click competitor name to see calculations.
The analysis of financial reporting quality reveals a significant expansion in the balance sheet scale accompanied by a stabilizing accruals ratio. While the initial periods were characterized by extreme volatility, the most recent data indicates a trend toward moderation in the relationship between accruals and net operating assets.
- Net Operating Assets Expansion
- A consistent and accelerating increase in net operating assets is observed, rising from 252 million USD in 2022 to 26,195 million USD by 2026. The most substantial growth occurred between 2025 and 2026, indicating a massive expansion of the asset base used in operations.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited significant fluctuations over the five-year period. Accruals were deeply negative in 2022 and 2023, shifted to a positive 830 million USD in 2024, and subsequently returned to negative territory, reaching -1,142 million USD by 2026.
- Accruals Ratio Convergence
- The cash-flow-statement-based accruals ratio demonstrates a trajectory of convergence. An extreme negative ratio of -196.64% in 2022 transitioned to a positive 33.84% in 2024. In the final two years, the ratio stabilized at -8.91% and -7.34%. This suggests that the rapid growth in net operating assets has diluted the impact of aggregate accruals, leading to a more stable and lower percentage relative to the asset base.
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