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
Cummins 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 | 32,005) | 30,299) | 23,710) | 22,624) | 19,737) | |
| Less: Cash and cash equivalents | 2,179) | 2,101) | 2,592) | 3,401) | 1,129) | |
| Less: Marketable securities | 562) | 472) | 595) | 461) | 341) | |
| Operating assets | 29,264) | 27,726) | 20,523) | 18,762) | 18,267) | |
| Operating Liabilities | ||||||
| Total liabilities | 22,101) | 20,074) | 14,309) | 13,635) | 11,272) | |
| Less: Loans payable | 280) | 210) | 208) | 169) | 100) | |
| Less: Commercial paper | 1,496) | 2,574) | 313) | 323) | 660) | |
| Less: Current maturities of long-term debt | 118) | 573) | 59) | 62) | 31) | |
| Less: Long-term debt | 4,802) | 4,498) | 3,579) | 3,610) | 1,576) | |
| Operating liabilities | 15,405) | 12,219) | 10,150) | 9,471) | 8,905) | |
| Net operating assets1 | 13,859) | 15,507) | 10,373) | 9,291) | 9,362) | |
| Balance-sheet-based aggregate accruals2 | (1,648) | 5,134) | 1,082) | (71) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -11.22% | 39.68% | 11.00% | -0.76% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | -22.39% | -12.09% | 30.23% | — | — | |
| Caterpillar Inc. | 9.40% | 1.82% | 4.22% | — | — | |
| Eaton Corp. plc | 2.18% | 2.87% | 10.92% | — | — | |
| GE Aerospace | -50.58% | -7.82% | -33.29% | — | — | |
| Honeywell International Inc. | 7.21% | -1.99% | 9.04% | — | — | |
| Lockheed Martin Corp. | 2.60% | 15.67% | 23.38% | — | — | |
| RTX Corp. | -1.23% | 1.57% | 1.48% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.90% | -0.33% | -0.06% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | -1.04% | 0.29% | 3.43% | 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
= 29,264 – 15,405 = 13,859
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 13,859 – 15,507 = -1,648
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,648 ÷ [(13,859 + 15,507) ÷ 2] = -11.22%
4 Click competitor name to see calculations.
The data indicates notable fluctuations in the financial reporting quality measures for the periods under review. Net operating assets exhibited a general upward trend from 2020 to 2022, increasing from 9,291 million US dollars to a peak of 15,507 million US dollars. However, in 2023, there was a decline to 13,859 million US dollars, suggesting a reduction in operating asset base after a strong growth phase.
Balance-sheet-based aggregate accruals showed considerable volatility. The measure started with a negative value of -71 million US dollars in 2020, increased sharply to 1,082 million US dollars in 2021, and then rose dramatically to 5,134 million US dollars in 2022. This surge was followed by a reversal to a negative figure of -1,648 million US dollars in 2023. Such variability implies significant changes in accrual accounting components, reflecting shifts in non-cash items that impact earnings quality.
The balance-sheet-based accruals ratio echoed the pattern observed in aggregate accruals, moving from a negative ratio of -0.76% in 2020 to a positive 11.00% in 2021, peaking at a substantial 39.68% in 2022. In 2023, this ratio flipped back to a negative value of -11.22%. These fluctuations suggest that the proportion of accruals relative to net operating assets has been highly inconsistent, which may indicate variable earnings persistence and potentially affect the predictability of future cash flows.
- Net Operating Assets
- Increased steadily in the first three years, reaching a high in 2022 before declining in 2023.
- Aggregate Accruals
- Exhibited significant swings, with a large increase by 2022 followed by a sharp decrease in 2023.
- Accruals Ratio
- Demonstrated marked volatility, including transitions between negative and high positive percentages, indicating fluctuating earnings quality.
Overall, the data points to a period of considerable financial variability, especially in accrual-related measures. The large movements in accruals and their ratios highlight potential concerns regarding the consistency and quality of reported earnings during these years. The decline in net operating assets in the last year may also warrant further analysis to understand underlying operational changes.
Cash-Flow-Statement-Based Accruals Ratio
Cummins 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 Cummins Inc. | 735) | 2,151) | 2,131) | 1,789) | 2,260) | |
| Less: Net cash provided by operating activities | 3,966) | 1,962) | 2,256) | 2,722) | 3,181) | |
| Less: Net cash used in investing activities | (1,643) | (4,172) | (873) | (719) | (1,150) | |
| Cash-flow-statement-based aggregate accruals | (1,588) | 4,361) | 748) | (214) | 229) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -10.82% | 33.70% | 7.61% | -2.29% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -26.69% | -50.32% | -43.09% | — | — | |
| Caterpillar Inc. | 6.90% | 3.26% | 5.38% | — | — | |
| Eaton Corp. plc | 8.52% | 4.55% | 7.52% | — | — | |
| GE Aerospace | -8.42% | -15.92% | -53.22% | — | — | |
| Honeywell International Inc. | 5.80% | -0.79% | 2.16% | — | — | |
| Lockheed Martin Corp. | 3.08% | -1.36% | -10.24% | — | — | |
| RTX Corp. | -1.66% | 0.87% | -1.96% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.94% | -5.98% | -13.86% | -3.12% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | 1.67% | -2.31% | -8.91% | -5.18% | — | |
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 × -1,588 ÷ [(13,859 + 15,507) ÷ 2] = -10.82%
2 Click competitor name to see calculations.
The data reveals the following insights related to the financial reporting quality of the company over the four-year period ending December 31, 2023.
- Net Operating Assets
- The net operating assets demonstrate an overall upward trend from 9,291 million US dollars in 2020 to a peak of 15,507 million in 2022, followed by a decline to 13,859 million in 2023. This indicates expansion in the company's operating asset base up to 2022, with a contraction or possible optimization occurring in the subsequent year.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibit substantial volatility across the periods. The value shifted from a negative 214 million in 2020, implying conservative accruals, to a positive 748 million in 2021, and then surged sharply to 4,361 million in 2022. In 2023, the figure sharply reversed back to a negative 1,588 million. This erratic movement suggests considerable fluctuations in reported earnings adjustments relative to cash flows, potentially signaling inconsistent earnings quality or changes in accounting policies or operational conditions.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrors the pattern of aggregate accruals with significant oscillations. Starting at -2.29% in 2020, it rose to 7.61% in 2021 and peaked at an elevated 33.7% in 2022, representing a substantial deviation from operating asset base toward accruals. In 2023, this ratio dropped sharply to -10.82%, indicating a reversal in trend and suggesting a considerable reliance on cash flows rather than accrual adjustments in that year. Such variability may reflect inconsistencies in the quality or sustainability of reported earnings.
In summary, the company’s net operating assets have grown overall but declined recently, while accrual measures show pronounced volatility. This pattern points to fluctuating earnings management or variability in the relation between earnings components and cash flows, which could impact the reliability and quality of the reported financial results.