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.
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Abbott Laboratories pages available for free this week:
- Balance Sheet: Assets
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Net Profit Margin since 2005
- Current Ratio since 2005
- Total Asset Turnover since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Abbott Laboratories, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Investments, primarily bank time deposits and U.S. treasury bills | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Elevance Health Inc. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits significant fluctuation over the observed period. Net operating assets demonstrate a consistent upward trend, while aggregate accruals and the resulting accruals ratio display more dynamic behavior.
- Net Operating Assets
- Net operating assets increased steadily from US$43,508 million in 2022 to US$56,761 million in 2025, indicating consistent growth in the company’s operational investments and assets. The growth rate appears to be accelerating, with larger absolute increases observed in 2024 and 2025.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals were negative in 2022, at -US$317 million, suggesting a reduction in accruals relative to cash flows during that year. A substantial positive shift occurred in 2023, with accruals reaching US$2,719 million. This trend continued into 2024, with accruals peaking at US$7,832 million, before decreasing to US$2,702 million in 2025. This pattern suggests a potential for earnings management or significant changes in the timing of cash flows relative to reported revenues and expenses.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals. In 2022, the ratio was -0.73%, indicating that accruals reduced net operating assets. The ratio increased significantly to 6.06% in 2023 and further to 15.62% in 2024, suggesting a growing reliance on accruals to generate reported earnings. The ratio decreased to 4.88% in 2025, though remaining substantially higher than the 2022 level. A ratio consistently above zero indicates that reported earnings are increasingly dependent on accruals rather than cash flow from operations. The peak in 2024 warrants further investigation to understand the underlying drivers of this substantial increase.
The divergence between the increasing net operating assets and the fluctuating accruals ratio suggests a changing relationship between operational performance and reported earnings. The substantial increase in the accruals ratio in 2024, followed by a decrease in 2025, requires further scrutiny to assess the sustainability of earnings and the quality of financial reporting.
Cash-Flow-Statement-Based Accruals Ratio
Abbott Laboratories, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net earnings | ||||||
| Less: Net cash from operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Elevance Health Inc. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The information presents a review of net operating assets, cash-flow-statement-based aggregate accruals, and the resulting accruals ratio over a four-year period. A notable fluctuation in accruals is observed, warranting further investigation into the underlying drivers.
- Net Operating Assets
- Net operating assets demonstrate a consistent upward trend throughout the period, increasing from US$43,508 million in 2022 to US$56,761 million in 2025. This indicates overall growth in the company’s operational investments and resources.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals exhibit significant volatility. Accruals were negative in 2022 at -US$908 million, then became positive and increased substantially to US$7,182 million in 2024. In 2025, accruals turned negative again, reaching -US$620 million. This pattern suggests considerable changes in the timing of cash receipts and payments relative to reported earnings.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend in aggregate accruals. It began at -2.08% in 2022, rose to a peak of 14.32% in 2024, and then decreased to -1.12% in 2025. The substantial increase in 2024, followed by a return to a negative value in 2025, is particularly noteworthy. An accruals ratio significantly deviating from zero may indicate potential earnings management or aggressive accounting practices, and the observed pattern suggests a need for deeper scrutiny of the components driving these accruals. The negative ratio in 2022 and 2025 indicates that cash flows from operations were higher than reported net income, while the positive ratio in 2023 and 2024 suggests the opposite.
The large fluctuations in both aggregate accruals and the accruals ratio suggest that reported earnings are not consistently supported by underlying cash flows. The shift from positive to negative accruals in the most recent year warrants further investigation to determine the cause and assess any potential implications for the quality of reported earnings.