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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

3M Co., 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
Less: Cash and cash equivalents
Less: Marketable securities, current
Operating assets
Operating Liabilities
Total liabilities
Less: Short-term borrowings and current portion of long-term debt
Less: Long-term debt, excluding current portion
Less: Capital lease obligations
Operating liabilities
Net operating assets1
Balance-sheet-based aggregate accruals2
Ratio
Balance-sheet-based accruals ratio3 % % % % %
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Danaher Corp. % % % % %
General Electric Co. % % % % %
Honeywell International Inc. % % % % %
Balance-Sheet-Based Accruals Ratio, Sector
General Industrials % % % % %
Balance-Sheet-Based Accruals Ratio, Industry
Industrials % % % % %

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= =

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= =

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

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, 3M Co. deteriorated earnings quality from 2016 to 2017.

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Cash-Flow-Statement-Based Accruals Ratio

3M Co., 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 attributable to 3M
Less: Net cash provided by operating activities
Less: Net cash used in investing activities
Cash-flow-statement-based aggregate accruals
Ratio
Cash-flow-statement-based accruals ratio1 % % % % %
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Danaher Corp. % % % % %
General Electric Co. % % % % %
Honeywell International Inc. % % % % %
Cash-Flow-Statement-Based Accruals Ratio, Sector
General Industrials % % % % %
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials % % % % %

2017 Calculations

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

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, 3M Co. deteriorated earnings quality from 2016 to 2017.

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