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

FedEx Corp., balance sheet computation of aggregate accruals

USD $ in millions

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Operating Assets
Total assets 48,552  46,064  37,069  33,070  33,567  29,903 
Less: Cash and cash equivalents 3,969  3,534  3,763  2,908  4,917  2,843 
Operating assets 44,583  42,530  33,306  30,162  28,650  27,060 
Operating Liabilities
Total liabilities 32,479  32,280  22,076  17,793  16,169  15,176 
Less: Current portion of long-term debt 22  29  19  251  417 
Less: Long-term debt, less current portion 14,909  13,838  7,249  4,736  2,739  1,250 
Operating liabilities 17,548  18,413  14,808  13,056  13,179  13,509 
Net operating assets1 27,035  24,117  18,498  17,106  15,471  13,551 
Balance-sheet-based aggregate accruals2 2,918  5,619  1,392  1,635  1,920 
Ratio
Balance-sheet-based accruals ratio3 11.41% 26.37% 7.82% 10.04% 13.23% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Union Pacific Corp. 18.50% 0.45% 7.52% 5.67% –% –%
United Parcel Service Inc. 56.12% -1.35% 22.40% -22.53% –% –%
Balance-Sheet-Based Accruals Ratio, Sector
Industrial Transportation 24.09% 8.38% 10.26% 1.56% 200.00% –%
Balance-Sheet-Based Accruals Ratio, Industry
Industrials 4.68% -9.96% 19.93% -3.97% 200.00% –%

2017 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 44,583 – 17,548 = 27,035

2 Balance-sheet-based aggregate accruals = Net operating assets 2017 – Net operating assets 2016
= 27,035 – 24,117 = 2,918

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,918 ÷ [(27,035 + 24,117) ÷ 2] = 11.41%

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

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Cash-Flow-Statement-Based Accruals Ratio

FedEx Corp., cash flow statement computation of aggregate accruals

USD $ in millions

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Net income 2,997  1,820  1,050  2,097  1,561  2,032 
Less: Cash provided by operating activities 4,930  5,708  5,366  4,264  4,688  4,835 
Less: Cash used in investing activities (4,981) (9,446) (5,752) (3,551) (3,803) (4,049)
Cash-flow-statement-based aggregate accruals 3,048  5,558  1,436  1,384  676  1,246 
Ratio
Cash-flow-statement-based accruals ratio1 11.92% 26.08% 8.07% 8.50% 4.66% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Union Pacific Corp. 17.71% 0.30% 5.90% 6.76% –% –%
United Parcel Service Inc. 50.66% -3.96% 25.03% 0.98% –% –%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Industrial Transportation 22.74% 7.75% 9.94% 6.16% 2.91% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials -0.38% -0.39% 6.64% 1.60% -1.84% –%

2017 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,048 ÷ [(27,035 + 24,117) ÷ 2] = 11.92%

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

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