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
General Dynamics Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 48,841) | 45,408) | 35,046) | 32,872) | 31,997) | |
| Less: Cash and equivalents | 902) | 963) | 2,983) | 2,334) | 2,785) | |
| Operating assets | 47,939) | 44,445) | 32,063) | 30,538) | 29,212) | |
| Operating Liabilities | ||||||
| Total liabilities | 35,264) | 33,676) | 23,611) | 21,896) | 21,259) | |
| Less: Short-term debt and current portion of long-term debt | 2,920) | 973) | 2) | 900) | 501) | |
| Less: Long-term debt, excluding current portion | 9,010) | 11,444) | 3,980) | 2,988) | 2,898) | |
| Operating liabilities | 23,334) | 21,259) | 19,629) | 18,008) | 17,860) | |
| Net operating assets1 | 24,605) | 23,186) | 12,434) | 12,530) | 11,352) | |
| Balance-sheet-based aggregate accruals2 | 1,419) | 10,752) | (96) | 1,178) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.94% | 60.37% | -0.77% | 9.87% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | — | — | — | — | — | |
| Caterpillar Inc. | — | — | — | — | — | |
| Eaton Corp. plc | — | — | — | — | — | |
| GE Aerospace | — | — | — | — | — | |
| Honeywell International Inc. | — | — | — | — | — | |
| Lockheed Martin Corp. | — | — | — | — | — | |
| RTX Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 47,939 – 23,334 = 24,605
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 24,605 – 23,186 = 1,419
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,419 ÷ [(24,605 + 23,186) ÷ 2] = 5.94%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited relative stability from 2016 to 2017, with a slight decrease from 12,530 million USD to 12,434 million USD. However, there was a pronounced increase in 2018, nearly doubling to 23,186 million USD, followed by a further moderate rise reaching 24,605 million USD in 2019. This trend indicates a significant expansion in the company's operating asset base during the latter part of the period under review.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals fluctuated substantially over the four-year period. Initially, accruals were positive at 1,178 million USD in 2016 but turned negative to -96 million USD in 2017, suggesting a reversal or reduction in accrued items that year. In 2018, accruals increased dramatically to 10,752 million USD, marking an unusually high level of accruals relative to the prior years. In 2019, the figure sharply declined to 1,419 million USD, indicating normalization but still elevated in comparison to 2016 and 2017 levels.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the patterns observed in aggregate accruals but presents the data in relative terms. The ratio was 9.87% in 2016, turned negative at -0.77% in 2017, signifying net reversals in accruals relative to net operating assets. In 2018, the ratio surged dramatically to 60.37%, indicative of an extraordinary increase in accruals relative to operating assets. By 2019, the ratio had decreased markedly to 5.94%, reflecting a significant reduction in accrual intensity but remaining higher than the initial years.
- Summary
- The data reveals a period of financial statement variability, notably in 2018. The substantial rise in net operating assets and the disproportionate increase in both aggregate accruals and accruals ratio suggest increased accrual-based accounting activities during that year. The heightened accruals ratio in 2018 could imply increased estimation or judgment in financial reporting. The decline in these measures in 2019 signals a partial reversion towards typical operating and accrual levels. These patterns highlight areas warranting further investigation regarding the drivers of asset growth and accrual fluctuations to assess potential impacts on financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
General Dynamics Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net earnings | 3,484) | 3,345) | 2,912) | 2,955) | 2,965) | |
| Less: Net cash provided by operating activities | 2,981) | 3,148) | 3,879) | 2,198) | 2,499) | |
| Less: Net cash (used) provided by investing activities | (994) | (10,234) | (791) | (426) | 200) | |
| Cash-flow-statement-based aggregate accruals | 1,497) | 10,431) | (176) | 1,183) | 266) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 6.26% | 58.57% | -1.41% | 9.91% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | — | — | — | — | — | |
| Caterpillar Inc. | — | — | — | — | — | |
| Eaton Corp. plc | — | — | — | — | — | |
| GE Aerospace | — | — | — | — | — | |
| Honeywell International Inc. | — | — | — | — | — | |
| Lockheed Martin Corp. | — | — | — | — | — | |
| RTX Corp. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,497 ÷ [(24,605 + 23,186) ÷ 2] = 6.26%
2 Click competitor name to see calculations.
The financial data reveals notable fluctuations in both net operating assets and cash-flow-statement-based accruals over the four-year period ending December 31, 2019.
- Net operating assets
- The net operating assets remained relatively stable between 2016 and 2017, showing a slight decline from approximately $12,530 million to $12,434 million. However, in 2018, there was a significant increase to $23,186 million, followed by a further moderate rise to $24,605 million in 2019. This upward trend in the last two years indicates an expansion in the company's investment in operating assets.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals demonstrated considerable variability. Initially, the accruals were positive at $1,183 million in 2016 but shifted to a negative value of -$176 million in 2017, implying a reduction in accrual-based income components relative to cash flows. In 2018, there was an extraordinary increase to $10,431 million, which is disproportionately high compared to other years, raising questions about accrual quality or transitory accounting effects. By 2019, accruals sharply decreased again to $1,497 million, suggesting a reversion toward more typical levels.
- Cash-flow-statement-based accruals ratio
- This ratio mirrors the behavior of aggregate accruals relative to net operating assets. It was positive at 9.91% in 2016, then turned negative at -1.41% in 2017, consistent with the aggregate accruals trend. A pronounced spike to 58.57% occurred in 2018, indicating that accruals represented a very large proportion of net operating assets that year. The proportion significantly dropped again in 2019 to 6.26%, reflecting normalization. Such volatility, especially the 2018 spike, may indicate episodic changes in accounting practices or operational factors affecting earnings quality.
In summary, the data shows relative stability in net operating assets initially, followed by considerable growth in the later years. Accrual-based measures of earnings quality fluctuate markedly, with an extreme increase in 2018 that is not sustained. This pattern suggests potential anomalies or adjustments during that period, warranting further detailed review to assess implications for earnings reliability.