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
Corning Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 28,500) | 29,499) | 30,154) | 30,775) | 28,898) | |
| Less: Cash and cash equivalents | 1,779) | 1,671) | 2,148) | 2,672) | 2,434) | |
| Operating assets | 26,721) | 27,828) | 28,006) | 28,103) | 26,464) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,632) | 17,224) | 17,609) | 17,327) | 15,901) | |
| Less: Current portion of long-term debt and short-term borrowings | 320) | 224) | 55) | 156) | 11) | |
| Less: Long-term debt, excluding current portion | 7,206) | 6,687) | 6,989) | 7,816) | 7,729) | |
| Operating liabilities | 9,106) | 10,313) | 10,565) | 9,355) | 8,161) | |
| Net operating assets1 | 17,615) | 17,515) | 17,441) | 18,748) | 18,303) | |
| Balance-sheet-based aggregate accruals2 | 100) | 74) | (1,307) | 445) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 0.57% | 0.42% | -7.22% | 2.40% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | -9.04% | -2.12% | — | — | — | |
| Arista Networks Inc. | 17.14% | 106.22% | — | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | — | — | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | — | — | — | |
| Lumentum Holdings Inc. | 56.73% | -0.44% | — | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -6.32% | -13.26% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.81% | 19.09% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 26,721 – 9,106 = 17,615
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 17,615 – 17,515 = 100
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 100 ÷ [(17,615 + 17,515) ÷ 2] = 0.57%
4 Click competitor name to see calculations.
The evaluation of balance-sheet-based accruals indicates a period of significant volatility in financial reporting quality between 2020 and 2021, followed by a phase of stabilization through 2023. While the underlying asset base remained relatively constant, the relationship between earnings and cash flows experienced a sharp reversal and subsequent correction.
- Net Operating Assets Trend
- Net operating assets exhibited a slight overall decline over the four-year period, moving from $18,748 million in 2020 to $17,615 million in 2023. A notable dip occurred in 2021, where assets fell to $17,441 million, followed by a gradual recovery in 2022 and 2023. This suggests a stable operational scale with minimal fluctuations in the net investment in operating assets.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrated substantial variance, shifting from a positive $445 million in 2020 to a significant negative $1,307 million in 2021. This sharp transition indicates a period where cash flows likely exceeded reported accounting earnings. Following this outlier, accruals returned to low positive levels, recording $74 million in 2022 and $100 million in 2023.
- Accruals Ratio Analysis
- The accruals ratio, which measures the proportion of earnings not backed by cash flows relative to assets, plummeted from 2.40% in 2020 to -7.22% in 2021. The negative ratio in 2021 suggests conservative accounting or a temporary surge in cash collections relative to revenue recognition. By 2022 and 2023, the ratio stabilized at 0.42% and 0.57%, respectively. These near-zero positive values indicate that current earnings are closely aligned with cash flow, signaling high financial reporting quality and low reliance on non-cash accruals to drive reported performance.
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Cash-Flow-Statement-Based Accruals Ratio
Corning Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Corning Incorporated | 581) | 1,316) | 1,906) | 512) | 960) | |
| Less: Net cash provided by operating activities | 2,005) | 2,615) | 3,412) | 2,180) | 2,031) | |
| Less: Net cash used in investing activities | (1,000) | (1,355) | (1,419) | (1,310) | (1,891) | |
| Cash-flow-statement-based aggregate accruals | (424) | 56) | (87) | (358) | 820) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -2.41% | 0.32% | -0.48% | -1.93% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | -14.62% | 0.00% | — | — | — | |
| Arista Networks Inc. | 36.37% | 52.90% | — | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | — | — | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | — | — | — | |
| Lumentum Holdings Inc. | 33.53% | -2.83% | — | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -9.60% | -4.09% | -1.64% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -424 ÷ [(17,615 + 17,515) ÷ 2] = -2.41%
2 Click competitor name to see calculations.
Analysis of financial reporting quality over the period from 2020 to 2023 reveals a pattern of volatility in aggregate accruals against a relatively stable base of net operating assets.
- Net Operating Assets
- Net operating assets demonstrated stability throughout the period, beginning at US$ 18,748 million in 2020 and concluding at US$ 17,615 million in 2023. Following a decrease between 2020 and 2021, the asset base experienced marginal, steady growth through 2022 and 2023.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited inconsistent movement. The figures were negative in 2020 (US$ -358 million) and 2021 (US$ -87 million), shifted to a positive value of US$ 56 million in 2022, and then returned to a significant negative position in 2023, reaching a period low of US$ -424 million.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio fluctuated in alignment with the aggregate accruals. The ratio moved from -1.93% in 2020 to 0.32% in 2022 before dropping to -2.41% in 2023. The prevalence of negative ratios in three of the four observed years indicates that cash flows generally exceeded accrual-based earnings, with the most significant divergence occurring in 2023.
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