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

Boeing 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 92,333  89,997  94,408  99,198  92,663 
Less: Cash and cash equivalents 8,813  8,801  11,302  11,733  9,088 
Less: Short-term and other investments 1,179  1,228  750  1,359  6,170 
Operating assets 82,341  79,968  82,356  86,106  77,405 
Operating Liabilities
Total liabilities 91,921  89,120  88,011  90,408  77,666 
Less: Short-term debt and current portion of long-term debt 1,335  384  1,234  929  1,563 
Less: Long-term debt, excluding current portion 9,782  9,568  8,730  8,141  8,072 
Operating liabilities 80,804  79,168  78,047  81,338  68,031 
Net operating assets1 1,537  800  4,309  4,768  9,374 
Balance-sheet-based aggregate accruals2 737  (3,509) (459) (4,606)
Ratio
Balance-sheet-based accruals ratio3 63.07% -137.37% -10.11% -65.14% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
General Dynamics Corp. -0.77% 9.87% –% -14.37% –%
Lockheed Martin Corp. -26.23% -20.54% 72.03% -3.98% –%
Northrop Grumman Corp. 12.46% 0.60% 4.51% -20.29% –%
Raytheon Co. -2.62% -2.91% 21.45% -11.85% –%
United Technologies Corp. 7.98% 8.80% -11.04% -3.51% –%
Balance-Sheet-Based Accruals Ratio, Sector
Aerospace & Defense 2.27% -2.03% 7.04% -12.14% –%
Balance-Sheet-Based Accruals Ratio, Industry
Industrials 4.68% -9.96% 19.93% -3.97% –%

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 82,341 – 80,804 = 1,537

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 1,537 – 800 = 737

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 737 ÷ [(1,537 + 800) ÷ 2] = 63.07%

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, Boeing Co. improved earnings quality from 2016 to 2017.

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Cash-Flow-Statement-Based Accruals Ratio

Boeing 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 earnings related to parent 8,197  4,895  5,176  5,446  4,585 
Less: Net cash provided by operating activities 13,344  10,499  9,363  8,858  8,179 
Less: Net cash (used) provided by investing activities (2,062) (3,380) (1,846) 2,467  (5,154)
Cash-flow-statement-based aggregate accruals (3,085) (2,224) (2,341) (5,879) 1,560 
Ratio
Cash-flow-statement-based accruals ratio1 -264.01% -87.06% -51.58% -83.14% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
General Dynamics Corp. -1.41% 9.91% 2.34% -0.76% –%
Lockheed Martin Corp. -26.78% 7.01% 64.89% 17.75% –%
Northrop Grumman Corp. 2.79% 1.97% 2.72% 1.17% –%
Raytheon Co. 0.77% -5.49% 12.72% 13.68% –%
United Technologies Corp. 4.03% 2.60% 7.67% 2.47% –%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Aerospace & Defense -4.40% 0.73% 12.00% -1.74% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials -0.38% -0.39% 6.64% 1.60% –%

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,085 ÷ [(1,537 + 800) ÷ 2] = -264.01%

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, Boeing Co. deteriorated earnings quality from 2016 to 2017.

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