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

Chevron 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 253,806  260,078  266,103  266,026  253,753 
Less: Cash and cash equivalents 4,813  6,988  11,022  12,785  16,245 
Less: Time deposits
Less: Marketable securities 13  310  422  263 
Operating assets 248,984  253,077  254,771  252,811  237,237 
Operating Liabilities
Total liabilities 104,487  113,356  112,217  109,835  103,326 
Less: Short-term debt, net of unamortized discount and debt issuance costs 5,192  10,840  4,928  3,790  374 
Less: Long-term debt, net of unamortized discount and debt issuance costs 33,477  35,193  33,584  23,960  19,960 
Less: Capital lease obligations 94  93  80  68  97 
Operating liabilities 65,724  67,230  73,625  82,017  82,895 
Net operating assets1 183,260  185,847  181,146  170,794  154,342 
Balance-sheet-based aggregate accruals2 (2,587) 4,701  10,352  16,452 
Ratio
Balance-sheet-based accruals ratio3 -1.40% 2.56% 5.88% 10.12% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
ConocoPhillips -37.15% -6.18% -10.85% 3.11% –%
EOG Resources Inc. 11.98% 2.53% -13.11% 7.33% –%
Exxon Mobil Corp. 9.28% 0.54% 3.00% 3.59% –%
Occidental Petroleum Corp. -1.23% 2.77% -18.31% -31.96% –%
Phillips 66 9.96% 4.60% 15.33% 9.73% –%
Balance-Sheet-Based Accruals Ratio, Sector
Oil & Gas Producers 0.94% 0.89% 1.00% 3.24% –%
Balance-Sheet-Based Accruals Ratio, Industry
Oil & Gas 0.19% 1.12% 0.52% 4.93% –%

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 248,984 – 65,724 = 183,260

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 183,260 – 185,847 = -2,587

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -2,587 ÷ [(183,260 + 185,847) ÷ 2] = -1.40%

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, Chevron Corp. improved earnings quality from 2016 to 2017.

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Cash-Flow-Statement-Based Accruals Ratio

Chevron 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 (loss) attributable to Chevron Corporation 9,195  (497) 4,587  19,241  21,423 
Less: Net cash provided by operating activities 20,515  12,846  19,456  31,475  35,002 
Less: Net cash used for investing activities (8,201) (16,852) (23,808) (29,893) (35,609)
Cash-flow-statement-based aggregate accruals (3,119) 3,509  8,939  17,659  22,030 
Ratio
Cash-flow-statement-based accruals ratio1 -1.69% 1.91% 5.08% 10.86% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
ConocoPhillips -31.63% -6.85% -5.05% 7.79% –%
EOG Resources Inc. 11.19% -11.52% -13.85% 8.57% –%
Exxon Mobil Corp. 2.41% -0.87% 4.62% 7.12% –%
Occidental Petroleum Corp. -1.63% 5.75% -18.18% -4.97% –%
Phillips 66 7.94% 5.75% 15.39% 14.50% –%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Oil & Gas Producers -1.67% -0.24% 2.08% 7.84% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Oil & Gas -2.41% -2.12% 2.06% 6.86% –%

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,119 ÷ [(183,260 + 185,847) ÷ 2] = -1.69%

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, Chevron Corp. improved earnings quality from 2016 to 2017.

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