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
Best Buy Co. Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 17,504) | 19,067) | 15,591) | 12,901) | 13,049) | 13,856) | |
| Less: Cash and cash equivalents | 2,936) | 5,494) | 2,229) | 1,980) | 1,101) | 2,240) | |
| Less: Short-term investments | —) | —) | —) | —) | 2,032) | 1,681) | |
| Operating assets | 14,568) | 13,573) | 13,362) | 10,921) | 9,916) | 9,935) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,484) | 14,480) | 12,112) | 9,595) | 9,437) | 9,147) | |
| Less: Short-term debt | —) | 110) | —) | —) | —) | —) | |
| Less: Current portion of long-term debt | 13) | 14) | 14) | 56) | 544) | 44) | |
| Less: Long-term debt, excluding current portion | 1,216) | 1,253) | 1,257) | 1,332) | 811) | 1,321) | |
| Operating liabilities | 13,255) | 13,103) | 10,841) | 8,207) | 8,082) | 7,782) | |
| Net operating assets1 | 1,313) | 470) | 2,521) | 2,714) | 1,834) | 2,153) | |
| Balance-sheet-based aggregate accruals2 | 843) | (2,051) | (193) | 880) | (319) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 94.56% | -137.14% | -7.37% | 38.70% | -16.00% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 32.91% | — | — | — | — | — | |
| Home Depot Inc. | 9.91% | — | — | — | — | — | |
| Lowe’s Cos. Inc. | 2.66% | — | — | — | — | — | |
| TJX Cos. Inc. | 73.65% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 26.47% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 13.04% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 14,568 – 13,255 = 1,313
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 1,313 – 470 = 843
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 843 ÷ [(1,313 + 470) ÷ 2] = 94.56%
4 Click competitor name to see calculations.
The financial data exhibits significant volatility in balance-sheet-based accruals and net operating assets over the five-year period ending January 29, 2022. The lack of a consistent trend suggests substantial fluctuations in the relationship between reported earnings and cash-flow-related balance sheet movements.
- Net Operating Assets (NOA)
- Net operating assets demonstrated a non-linear trajectory. An initial increase from 1,834 million USD in February 2018 to a peak of 2,714 million USD in February 2019 was followed by a period of decline. A sharp contraction occurred by January 30, 2021, where NOA reached a period low of 470 million USD, before recovering to 1,313 million USD by January 29, 2022.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals shifted erratically between positive and negative values. The figures moved from -319 million USD in 2018 to a positive 880 million USD in 2019, returning to a negative 193 million USD in 2020. The most pronounced deviation occurred in January 2021, with accruals dropping to -2,051 million USD, followed by a sharp reversal to 843 million USD in January 2022.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects extreme variance, indicating instability in reporting quality or significant operational shifts. The ratio fluctuated from -16.00% in 2018 to 38.70% in 2019, and then to -7.37% in 2020. A critical outlier is observed in January 2021, where the ratio plummeted to -137.14%, followed by a dramatic swing to 94.56% in January 2022. These wide oscillations suggest that the components of the balance sheet shifted aggressively relative to the net operating assets during the final two years of the analyzed period.
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Cash-Flow-Statement-Based Accruals Ratio
Best Buy Co. Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 2,454) | 1,798) | 1,541) | 1,464) | 1,000) | 1,228) | |
| Less: Cash provided by operating activities | 3,252) | 4,927) | 2,565) | 2,408) | 2,141) | 2,545) | |
| Less: Cash (used in) provided by investing activities | (1,372) | (788) | (895) | 508) | (1,002) | (887) | |
| Cash-flow-statement-based aggregate accruals | 574) | (2,341) | (129) | (1,452) | (139) | (430) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 64.39% | -156.54% | -4.93% | -63.85% | -6.97% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | -8.54% | — | — | — | — | — | |
| Home Depot Inc. | 8.24% | — | — | — | — | — | |
| Lowe’s Cos. Inc. | -0.14% | — | — | — | — | — | |
| TJX Cos. Inc. | 55.57% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | -4.02% | 50.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 1.57% | 21.63% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 574 ÷ [(1,313 + 470) ÷ 2] = 64.39%
2 Click competitor name to see calculations.
The analysis of aggregate accruals over the five-year period ending January 29, 2022, reveals significant volatility in the relationship between reported earnings and operating cash flows. The fluctuations in both net operating assets and the accruals ratio suggest a period of substantial balance sheet restructuring and inconsistent reporting quality relative to cash generation.
- Net Operating Assets Trend
- Net operating assets experienced notable instability, rising from 1,834 million USD in February 2018 to a peak of 2,714 million USD in February 2019. A sharp contraction occurred by January 30, 2021, where assets declined to 470 million USD, before partially recovering to 1,313 million USD by January 29, 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals remained predominantly negative for most of the period, indicating that cash flows from operations generally exceeded net income. However, the magnitude of these accruals shifted drastically, moving from -139 million USD in 2018 to a deep low of -2,341 million USD in 2021. A significant reversal occurred in the final period, with accruals turning positive at 574 million USD in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio exhibited extreme variance, which serves as a primary indicator of reporting quality volatility. The ratio dropped from -6.97% in 2018 to -63.85% in 2019, returned to a baseline of -4.93% in 2020, and reached a critical low of -156.54% in 2021. This trend culminated in a sharp pivot to a positive 64.39% in 2022.
The extreme negative ratio observed in 2021, coinciding with the lowest level of net operating assets, suggests a period where cash inflows significantly outpaced accounting profits, potentially due to aggressive asset liquidation or the timing of working capital releases. The subsequent shift to a high positive ratio in 2022 indicates a fundamental change in the accrual pattern, where reported earnings have overtaken operating cash flows, which may point to increased non-cash revenue recognition or a buildup in operating assets.
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