Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

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

eBay Inc., balance sheet computation of aggregate accruals

USD $ in millions

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Operating Assets
Total assets 25,981  23,847  17,785  45,132  41,488 
Less: Cash and cash equivalents 2,120  1,816  1,832  6,328  4,494 
Less: Short-term investments 3,743  5,333  4,299  3,770  4,531 
Operating assets 20,118  16,698  11,654  35,034  32,463 
Operating Liabilities
Total liabilities 17,918  13,308  11,209  25,226  17,841 
Less: Short-term debt 781  1,451  850 
Less: Long-term debt 9,234  7,509  6,779  6,777  4,117 
Operating liabilities 7,903  4,348  4,430  17,599  13,718 
Net operating assets1 12,215  12,350  7,224  17,435  18,745 
Balance-sheet-based aggregate accruals2 (135) 5,126  (10,211) (1,310)
Ratio
Balance-sheet-based accruals ratio3 -1.10% 52.38% -82.82% -7.24% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Amazon.com Inc. 99.50% 20.86% 16.64% 76.27% –%
Costco Wholesale Corp. -6.51% 18.80% 2.66% 3.67% 9.24%
Home Depot Inc. -0.07% 2.47% -2.08% -2.97% –%
Lowe's Cos. Inc. 9.18% -5.72% -4.96% -2.13% –%
Netflix Inc. 50.97% 61.45% 66.11% 57.91% –%
Target Corp. -2.24% -12.59% -17.57% -13.08% –%
TJX Cos. Inc. -6.47% 11.27% 1.69% 24.47% –%
Walmart Inc. -4.36% -1.78% -3.86% 2.74% –%
Balance-Sheet-Based Accruals Ratio, Sector
General Retailers 9.97% 2.82% -7.62% 1.48% –%
Balance-Sheet-Based Accruals Ratio, Industry
Consumer Services 7.41% 14.42% 5.66% 2.78% –%

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 20,118 – 7,903 = 12,215

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 12,215 – 12,350 = -135

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -135 ÷ [(12,215 + 12,350) ÷ 2] = -1.10%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, eBay Inc. improved earnings quality from 2016 to 2017.

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Cash-Flow-Statement-Based Accruals Ratio

eBay Inc., cash flow statement computation of aggregate accruals

USD $ in millions

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net income (loss) (1,016) 7,266  1,725  46  2,856 
Less: Net cash provided by operating activities 3,146  2,827  2,877  5,677  4,995 
Less: Net cash used in investing activities (1,296) (2,008) (673) (2,673) (6,012)
Cash-flow-statement-based aggregate accruals (2,866) 6,447  (479) (2,958) 3,873 
Ratio
Cash-flow-statement-based accruals ratio1 -23.33% 65.87% -3.88% -16.35% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Amazon.com Inc. 45.50% -33.79% -47.47% -29.61% –%
Costco Wholesale Corp. -13.60% 12.02% 5.48% 1.65% 8.99%
Home Depot Inc. -0.96% 2.46% -2.50% -2.86% –%
Lowe's Cos. Inc. 4.08% -4.44% -5.37% -2.45% –%
Netflix Inc. 39.94% 48.86% 61.24% 32.90% –%
Target Corp. -5.22% -9.80% -19.15% -13.64% –%
TJX Cos. Inc. -2.63% 12.23% 5.23% 21.37% –%
Walmart Inc. -3.19% -1.60% -0.83% 3.88% –%
Cash-Flow-Statement-Based Accruals Ratio, Sector
General Retailers 2.26% 0.47% -4.81% -1.78% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Consumer Services 3.72% 2.72% 3.18% 1.22% –%

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,866 ÷ [(12,215 + 12,350) ÷ 2] = -23.33%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, eBay Inc. improved earnings quality from 2016 to 2017.

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