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 Mills Inc., balance sheet computation of aggregate accruals
US$ in thousands
| May 26, 2019 | May 27, 2018 | May 28, 2017 | May 29, 2016 | May 31, 2015 | May 25, 2014 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 30,111,200) | 30,624,000) | 21,812,600) | 21,712,300) | 21,964,500) | 23,145,700) | |
| Less: Cash and cash equivalents | 450,000) | 399,000) | 766,100) | 763,700) | 334,200) | 867,300) | |
| Operating assets | 29,661,200) | 30,225,000) | 21,046,500) | 20,948,600) | 21,630,300) | 22,278,400) | |
| Operating Liabilities | |||||||
| Total liabilities | 22,191,800) | 23,355,400) | 16,216,200) | 15,559,600) | 15,792,900) | 15,156,200) | |
| Less: Current portion of long-term debt | 1,396,500) | 1,600,100) | 604,700) | 1,103,400) | 1,000,400) | 1,250,600) | |
| Less: Notes payable | 1,468,700) | 1,549,800) | 1,234,100) | 269,800) | 615,800) | 1,111,700) | |
| Less: Long-term debt, excluding current portion | 11,624,800) | 12,668,700) | 7,642,900) | 7,057,700) | 7,607,700) | 6,423,500) | |
| Operating liabilities | 7,701,800) | 7,536,800) | 6,734,500) | 7,128,700) | 6,569,000) | 6,370,400) | |
| Net operating assets1 | 21,959,400) | 22,688,200) | 14,312,000) | 13,819,900) | 15,061,300) | 15,908,000) | |
| Balance-sheet-based aggregate accruals2 | (728,800) | 8,376,200) | 492,100) | (1,241,400) | (846,700) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -3.26% | 45.28% | 3.50% | -8.60% | -5.47% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Coca-Cola Co. | — | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-05-26), 10-K (reporting date: 2018-05-27), 10-K (reporting date: 2017-05-28), 10-K (reporting date: 2016-05-29), 10-K (reporting date: 2015-05-31), 10-K (reporting date: 2014-05-25).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 29,661,200 – 7,701,800 = 21,959,400
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 21,959,400 – 22,688,200 = -728,800
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -728,800 ÷ [(21,959,400 + 22,688,200) ÷ 2] = -3.26%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between May 2015 and May 2019 reveals a period of significant volatility in accrual levels, punctuated by a substantial anomaly in the 2018 fiscal year. The reporting quality, as measured by the balance-sheet-based accruals ratio, shifted from a conservative posture characterized by negative accruals to an extreme positive peak before returning to a negative state.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2015 and 2017, fluctuating between 13.8 billion and 15.1 billion US dollars. However, a sharp increase occurred in May 2018, where assets rose to 22.7 billion US dollars, representing a growth of approximately 58.6% in a single year. This figure moderated slightly to 22.0 billion US dollars by May 2019.
- Aggregate Accruals Volatility
- Aggregate accruals exhibited a fluctuating pattern, starting with negative values of -846.7 million US dollars in 2015 and -1.24 billion US dollars in 2016. A reversal to positive territory occurred in 2017 at 492.1 million US dollars, followed by an unprecedented surge to 8.38 billion US dollars in 2018. By 2019, accruals reverted to a negative value of -728.8 million US dollars.
- Accruals Ratio Interpretation
- The accruals ratio remained low and negative from 2015 to 2016, reaching -8.60%, which typically suggests that cash flows exceeded reported earnings. The ratio shifted to 3.50% in 2017 and spiked to 45.28% in 2018. This extreme outlier in 2018 correlates directly with the surge in net operating assets, suggesting that a significant portion of the asset growth was not offset by immediate cash flows. The return to -3.26% in 2019 indicates a normalization of reporting quality and a return to a more conservative accrual profile.
The data indicates that the 2018 fiscal year represents a structural departure from the company's typical accrual patterns. The simultaneous spike in both net operating assets and the accruals ratio suggests a major balance sheet event—such as a large-scale acquisition or asset revaluation—that temporarily inflated the gap between accounting earnings and cash flow.
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Cash-Flow-Statement-Based Accruals Ratio
General Mills Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| May 26, 2019 | May 27, 2018 | May 28, 2017 | May 29, 2016 | May 31, 2015 | May 25, 2014 | ||
|---|---|---|---|---|---|---|---|
| Net earnings attributable to General Mills | 1,752,700) | 2,131,000) | 1,657,500) | 1,697,400) | 1,221,300) | 1,824,400) | |
| Less: Net cash provided by operating activities | 2,807,000) | 2,841,000) | 2,313,300) | 2,629,800) | 2,542,800) | 2,541,000) | |
| Less: Net cash (used) provided by investing activities | (556,500) | (8,685,400) | (646,900) | 93,400) | (1,602,200) | (561,800) | |
| Cash-flow-statement-based aggregate accruals | (497,800) | 7,975,400) | (8,900) | (1,025,800) | 280,700) | (154,800) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -2.23% | 43.11% | -0.06% | -7.10% | 1.81% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Coca-Cola Co. | — | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-05-26), 10-K (reporting date: 2018-05-27), 10-K (reporting date: 2017-05-28), 10-K (reporting date: 2016-05-29), 10-K (reporting date: 2015-05-31), 10-K (reporting date: 2014-05-25).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -497,800 ÷ [(21,959,400 + 22,688,200) ÷ 2] = -2.23%
2 Click competitor name to see calculations.
An analysis of the cash-flow-statement-based accruals from 2015 to 2019 reveals significant volatility in the relationship between accounting earnings and cash flows, particularly during the 2018 fiscal year. While the accruals ratio remained relatively low and stable between 2015 and 2017, a substantial deviation occurred in 2018 before returning to a negative trajectory in 2019.
- Net Operating Assets Trend
- Net operating assets exhibited a fluctuating pattern, starting at 15.06 billion US dollars in 2015 and dipping to 13.82 billion US dollars in 2016. A significant expansion is observed in 2018, where assets peaked at 22.69 billion US dollars, representing a nearly 58% increase from the previous year, followed by a slight contraction to 21.96 billion US dollars in 2019.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals shifted from a positive 280.7 million US dollars in 2015 to a negative 1.03 billion US dollars in 2016. Following a near-zero reading in 2017, a massive spike occurred in 2018, reaching 7.98 billion US dollars. This trend reversed sharply in 2019, with accruals falling to negative 497.8 million US dollars.
- Accruals Ratio Volatility
- The accruals ratio shows extreme variance, moving from 1.81% in 2015 to -7.10% in 2016 and -0.06% in 2017. The most notable outlier is the 2018 ratio of 43.11%, indicating that a substantial portion of the reported earnings for that period was not supported by operating cash flows. By 2019, the ratio normalized to -2.23%.
The sharp increase in both net operating assets and the accruals ratio during the 2018 period suggests a major non-cash accounting event or a significant structural change in the balance sheet. Such a high positive accruals ratio typically indicates a divergence where accounting profits exceed cash generation, which can be a signal of lower earnings quality for that specific period.
Overall, the transition from a high positive ratio in 2018 to a negative ratio in 2019 suggests a correction or a reversal of the prior year's accrual patterns. The predominance of negative or low positive ratios in four of the five years analyzed indicates that, excluding the 2018 anomaly, cash flows generally aligned with or exceeded accounting earnings.
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