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

CVS Health Corp., 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 95,131  94,462  93,657  74,252  71,526 
Less: Cash and cash equivalents 1,696  3,371  2,459  2,481  4,089 
Less: Short-term investments 111  87  88  34  88 
Operating assets 93,324  91,004  91,110  71,737  67,349 
Operating Liabilities
Total liabilities 57,436  57,628  56,415  36,289  33,588 
Less: Short-term debt 1,276  1,874  685 
Less: Current portion of long-term debt 3,545  42  1,197  575  561 
Less: Long-term debt, excluding current portion 22,181  25,615  26,267  11,695  12,841 
Operating liabilities 30,434  30,097  28,951  23,334  20,186 
Net operating assets1 62,890  60,907  62,159  48,403  47,163 
Balance-sheet-based aggregate accruals2 1,983  (1,252) 13,756  1,240 
Ratio
Balance-sheet-based accruals ratio3 3.20% -2.03% 24.88% 2.60% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Walgreens Boots Alliance Inc. -4.12% -7.74% 62.23% 0.13% 0.29%
Balance-Sheet-Based Accruals Ratio, Sector
Food & Drug Retailers 0.39% -4.32% 38.72% 1.81% –%
Balance-Sheet-Based Accruals Ratio, Industry
Consumer Services 7.57% 15.13% 5.92% 3.67% –%

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 93,324 – 30,434 = 62,890

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 62,890 – 60,907 = 1,983

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,983 ÷ [(62,890 + 60,907) ÷ 2] = 3.20%

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, CVS Health Corp. deteriorated earnings quality from 2016 to 2017.

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Cash-Flow-Statement-Based Accruals Ratio

CVS Health Corp., 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 CVS Health 6,622  5,317  5,237  4,644  4,592 
Less: Net cash provided by operating activities 8,007  10,069  8,412  8,137  5,783 
Less: Net cash used in investing activities (2,932) (2,470) (13,420) (4,045) (1,835)
Cash-flow-statement-based aggregate accruals 1,547  (2,282) 10,245  552  644 
Ratio
Cash-flow-statement-based accruals ratio1 2.50% -3.71% 18.53% 1.16% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Walgreens Boots Alliance Inc. -6.02% -0.38% 8.70% -1.03% 0.65%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Food & Drug Retailers -0.78% -2.38% 14.89% 0.46% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Consumer Services 3.80% 2.82% 3.25% 1.53% –%

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,547 ÷ [(62,890 + 60,907) ÷ 2] = 2.50%

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, CVS Health Corp. improved earnings quality from 2016 to 2017.

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