Microsoft Excel LibreOffice Calc

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

Emerson Electric Co., balance sheet computation of aggregate accruals

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Operating Assets
Total assets 19,589  21,743  22,088  24,177  24,711  23,818 
Less: Cash and equivalents 3,062  3,182  3,054  3,149  3,275  2,367 
Operating assets 16,527  18,561  19,034  21,028  21,436  21,451 
Operating Liabilities
Total liabilities 10,819  14,125  13,960  14,010  13,993  13,376 
Less: Short-term borrowings and current maturities of long-term debt 862  2,584  2,553  2,465  1,587  1,506 
Less: Long-term debt, excluding current maturities 3,794  4,062  4,289  3,559  4,055  3,787 
Operating liabilities 6,163  7,479  7,118  7,986  8,351  8,083 
Net operating assets1 10,364  11,082  11,916  13,042  13,085  13,368 
Balance-sheet-based aggregate accruals2 (718) (834) (1,126) (43) (283)
Ratio
Balance-sheet-based accruals ratio3 -6.70% -7.25% -9.02% -0.33% -2.14%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Industry
Industrials 8.49% -15.11% -22.63% -5.52% 200.00%

Based on: 10-K (filing date: 2017-11-20), 10-K (filing date: 2016-11-16), 10-K (filing date: 2015-11-18), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-19), 10-K (filing date: 2012-11-20).

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 16,5276,163 = 10,364

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 10,36411,082 = -718

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -718 ÷ [(10,364 + 11,082) ÷ 2] = -6.70%

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, Emerson Electric Co. improved earnings quality from 2016 to 2017.

Cash-Flow-Statement-Based Accruals Ratio

Emerson Electric Co., cash flow statement computation of aggregate accruals

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Net earnings common stockholders 1,518  1,635  2,710  2,147  2,004  1,968 
Less: Cash provided by operating activities 2,690  2,499  2,529  3,692  3,649  3,053 
Less: Cash (used in) provided by investing activities (3,533) (549) 591  (1,159) (789) (806)
Cash-flow-statement-based aggregate accruals 2,361  (315) (410) (386) (856) (279)
Ratio
Cash-flow-statement-based accruals ratio1 22.02% -2.74% -3.29% -2.95% -6.47%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials -2.18% -8.32% -6.18% -0.85% -11.75%

Based on: 10-K (filing date: 2017-11-20), 10-K (filing date: 2016-11-16), 10-K (filing date: 2015-11-18), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-19), 10-K (filing date: 2012-11-20).

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,361 ÷ [(10,364 + 11,082) ÷ 2] = 22.02%

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, Emerson Electric Co. deteriorated earnings quality from 2016 to 2017.