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.
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Freeport-McMoRan Inc. pages available for free this week:
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Geographic Areas
- Common Stock Valuation Ratios
- Net Profit Margin since 2005
- Price to Earnings (P/E) since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Book Value (P/BV) since 2005
- Price to Sales (P/S) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Freeport-McMoRan Inc., balance sheet computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
Net operating assets exhibited a consistent upward trend over the four-year period, increasing from US$27,234 million in 2022 to US$36,091 million in 2025. Concurrent with this growth in operating assets, balance-sheet-based aggregate accruals also generally increased, though with some fluctuation. The balance-sheet-based accruals ratio, which represents these accruals as a percentage of net operating assets, demonstrates a dynamic pattern over the observed timeframe.
- Balance-Sheet-Based Accruals Ratio Trend
- The balance-sheet-based accruals ratio increased from 10.97% in 2022 to 12.18% in 2023, indicating a larger proportion of operating assets were financed by accruals. A significant decrease was then observed in 2024, with the ratio falling to 6.75%. This suggests a reduced reliance on accruals relative to operating assets during that year. The ratio partially recovered in 2025, rising to 9.20%, but remained below the levels seen in 2022 and 2023.
The initial increase in the accruals ratio, followed by a substantial decline and partial recovery, warrants further investigation. The decrease in 2024 could be attributable to improved cash flow from operations, a change in accounting practices, or a deliberate effort to reduce reliance on accrual-based financing. The subsequent increase in 2025 may indicate a return to previous patterns or be driven by specific operational or investment activities. The fluctuations in the accruals ratio, while not necessarily indicative of manipulation, should be examined in conjunction with other financial metrics and qualitative factors to assess the overall quality of financial reporting.
- Relationship Between Operating Assets and Accruals
- While both net operating assets and aggregate accruals increased overall, the accruals ratio’s volatility suggests that the relationship between the two is not consistently proportional. The growth in operating assets outpaced the growth in accruals in 2024, leading to the ratio’s decline. This decoupling highlights the importance of analyzing accruals not just in absolute terms, but also relative to the size of the underlying asset base.
Continued monitoring of the balance-sheet-based accruals ratio, alongside a thorough understanding of the underlying business drivers, is recommended to maintain a comprehensive assessment of financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Freeport-McMoRan Inc., cash flow statement computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
Net operating assets exhibited a consistent upward trend over the four-year period, increasing from US$27,234 million in 2022 to US$36,091 million in 2025. Concurrently, cash-flow-statement-based aggregate accruals and the corresponding accruals ratio demonstrated more volatility. The accruals ratio initially decreased, then became negative, before recovering in the final year.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals decreased from US$1,769 million in 2022 to US$1,525 million in 2023, representing a reduction in the cumulative non-cash adjustments impacting net income. A significant shift occurred in 2024, with accruals becoming negative at -US$243 million. This indicates that non-cash deductions exceeded non-cash revenues. The final year, 2025, saw a return to positive accruals, reaching US$1,066 million.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio followed a corresponding pattern. It declined from 6.85% in 2022 to 5.26% in 2023, suggesting a diminishing reliance on accruals relative to net operating assets. The ratio turned negative in 2024, reaching -0.76%, which is notable. This negative value implies that cash flows from operations were greater than reported net income when considering accrual adjustments. The ratio rebounded to 3.09% in 2025, indicating an increased level of accruals relative to net operating assets compared to the prior year, but remaining below the levels observed in 2022 and 2023.
- Overall Trend
- The initial decline in both accruals and the accruals ratio could suggest improved earnings quality, as a lower reliance on accruals is often viewed favorably. However, the subsequent negative accruals ratio in 2024 warrants further investigation. A negative ratio may indicate aggressive revenue recognition or delayed expense recognition, or potentially, a significant release of working capital. The return to a positive ratio in 2025 does not necessarily negate the concerns raised by the 2024 result, and continued monitoring is recommended to assess the sustainability of this trend.