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
PepsiCo Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 28, 2024 | Dec 30, 2023 | Dec 31, 2022 | Dec 25, 2021 | Dec 26, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 99,467) | 100,495) | 92,187) | 92,377) | 92,918) | |
| Less: Cash and cash equivalents | 8,505) | 9,711) | 4,954) | 5,596) | 8,185) | |
| Less: Short-term investments | 761) | 292) | 394) | 392) | 1,366) | |
| Operating assets | 90,201) | 90,492) | 86,839) | 86,389) | 83,367) | |
| Operating Liabilities | ||||||
| Total liabilities | 81,296) | 81,858) | 74,914) | 76,226) | 79,366) | |
| Less: Short-term debt obligations | 7,082) | 6,510) | 3,414) | 4,308) | 3,780) | |
| Less: Long-term debt obligations, excluding current maturities | 37,224) | 37,595) | 35,657) | 36,026) | 40,370) | |
| Operating liabilities | 36,990) | 37,753) | 35,843) | 35,892) | 35,216) | |
| Net operating assets1 | 53,211) | 52,739) | 50,996) | 50,497) | 48,151) | |
| Balance-sheet-based aggregate accruals2 | 472) | 1,743) | 499) | 2,346) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 0.89% | 3.36% | 0.98% | 4.76% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | 0.79% | 4.65% | -3.05% | 3.39% | — | |
| Mondelēz International Inc. | -5.84% | -4.19% | 7.90% | 0.47% | — | |
| Philip Morris International Inc. | -11.32% | 5.21% | 75.98% | 10.28% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | -2.93% | 2.19% | 11.97% | 3.62% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 1.15% | 2.58% | 7.61% | -0.13% | — | |
Based on: 10-K (reporting date: 2024-12-28), 10-K (reporting date: 2023-12-30), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-25), 10-K (reporting date: 2020-12-26).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 90,201 – 36,990 = 53,211
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 53,211 – 52,739 = 472
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 472 ÷ [(53,211 + 52,739) ÷ 2] = 0.89%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit a gradual upward trend over the four-year period. Beginning at 50,497 million US dollars in 2021, the value increased marginally to 50,996 million in 2022. This was followed by a more pronounced rise to 52,739 million in 2023 and a further increase to 53,211 million in 2024, indicating steady growth in the company's operating asset base.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals show significant fluctuations across the years. Starting at 2,346 million US dollars in 2021, aggregate accruals fell sharply to 499 million in 2022, then surged again to 1,743 million in 2023, before decreasing once more to 472 million in 2024. This volatility suggests variability in non-cash components impacting earnings or changes in the timing of revenue and expense recognition.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, follows a similar fluctuating pattern but remains at relatively moderate levels. It began at 4.76% in 2021, dropped steeply to 0.98% in 2022, increased to 3.36% in 2023, and then fell again to 0.89% in 2024. This pattern reinforces the observation of inconsistent accrual activity, which may affect the quality of earnings and warrants close monitoring.
Cash-Flow-Statement-Based Accruals Ratio
PepsiCo Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 28, 2024 | Dec 30, 2023 | Dec 31, 2022 | Dec 25, 2021 | Dec 26, 2020 | ||
|---|---|---|---|---|---|---|
| Net income attributable to PepsiCo | 9,578) | 9,074) | 8,910) | 7,618) | 7,120) | |
| Less: Net cash provided by operating activities | 12,507) | 13,442) | 10,811) | 11,616) | 10,613) | |
| Less: Net cash used for investing activities | (5,472) | (5,495) | (2,430) | (3,269) | (11,619) | |
| Cash-flow-statement-based aggregate accruals | 2,543) | 1,127) | 529) | (729) | 8,126) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 4.80% | 2.17% | 1.04% | -1.48% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | 2.32% | 4.51% | -1.32% | -0.16% | — | |
| Mondelēz International Inc. | -1.85% | -5.47% | 8.02% | 0.42% | — | |
| Philip Morris International Inc. | -12.14% | 6.40% | 57.17% | -3.48% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | -0.56% | 1.72% | 9.94% | -0.70% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | -0.17% | 2.27% | 4.81% | -4.89% | — | |
Based on: 10-K (reporting date: 2024-12-28), 10-K (reporting date: 2023-12-30), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-25), 10-K (reporting date: 2020-12-26).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,543 ÷ [(53,211 + 52,739) ÷ 2] = 4.80%
2 Click competitor name to see calculations.
The analysis of the financial reporting quality metrics over the four-year period reveals several notable trends and patterns.
- Net Operating Assets
- The net operating assets exhibit a steady increase each year, starting from approximately 50,497 million US dollars in 2021, rising slightly to 50,996 million in 2022, further increasing to 52,739 million in 2023, and reaching 53,211 million in 2024. This gradual growth indicates a consistent expansion in the company's operating asset base over the period under review.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals derived from the cash flow statement show a significant shift during the period. In 2021, the figure was negative, at -729 million US dollars, indicating potential cash flow timing differences or write-offs. This changes to positive values starting in 2022, with 529 million, then rising substantially to 1,127 million in 2023, and almost doubling again to 2,543 million in 2024. The rising aggregate accruals may suggest increasing differences between accounting earnings and cash flows, which could have implications for earnings quality.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the pattern seen in aggregate accruals. It moves from a negative ratio of -1.48% in 2021 to positive values starting with 1.04% in 2022, increasing to 2.17% in 2023, and reaching 4.8% in 2024. This upward trajectory reinforces the observation of growing accruals relative to net operating assets, suggesting a trend towards higher accrual-based earnings components in recent years.
In summary, the company demonstrates a consistent increase in net operating assets, indicating growth in operational capacity. Concurrently, the aggregate accruals and their ratio have shifted from negative to substantially positive and increasing values, which may be indicative of a rising portion of earnings attributable to accruals rather than cash flows. This trend warrants attention to assess its impact on earnings quality and the sustainability of reported profits.