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
Johnson & Johnson, balance sheet computation of aggregate accruals
US$ in millions
| Dec 28, 2025 | Dec 29, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 199,210) | 180,104) | 167,558) | 187,378) | 182,018) | |
| Less: Cash and cash equivalents | 19,709) | 24,105) | 21,859) | 14,127) | 14,487) | |
| Less: Marketable securities | 393) | 417) | 1,068) | 9,392) | 17,121) | |
| Operating assets | 179,108) | 155,582) | 144,631) | 163,859) | 150,410) | |
| Operating Liabilities | ||||||
| Total liabilities | 117,666) | 108,614) | 98,784) | 110,574) | 107,995) | |
| Less: Loans and notes payable | 8,495) | 5,983) | 3,451) | 12,771) | 3,766) | |
| Less: Long-term debt, excluding current portion | 39,438) | 30,651) | 25,881) | 26,888) | 29,985) | |
| Operating liabilities | 69,733) | 71,980) | 69,452) | 70,915) | 74,244) | |
| Net operating assets1 | 109,375) | 83,602) | 75,179) | 92,944) | 76,166) | |
| Balance-sheet-based aggregate accruals2 | 25,773) | 8,423) | (17,765) | 16,778) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 26.71% | 10.61% | -21.13% | 19.84% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -9.59% | 13.10% | -22.39% | -14.27% | — | |
| Amgen Inc. | 0.24% | -10.36% | 57.08% | 4.07% | — | |
| Bristol-Myers Squibb Co. | -4.13% | -3.21% | -7.12% | -3.86% | — | |
| Danaher Corp. | 4.42% | -3.94% | 3.48% | -1.55% | — | |
| Eli Lilly & Co. | 32.18% | 29.20% | 28.59% | 11.56% | — | |
| Gilead Sciences Inc. | 10.43% | -11.79% | 1.04% | -2.92% | — | |
| Merck & Co. Inc. | 22.44% | 6.20% | 3.16% | 0.46% | — | |
| Pfizer Inc. | 4.15% | -11.48% | 30.66% | 24.95% | — | |
| Regeneron Pharmaceuticals Inc. | 9.55% | 25.51% | 1.17% | 11.07% | — | |
| Thermo Fisher Scientific Inc. | 9.41% | 2.28% | 4.96% | -1.78% | — | |
| Vertex Pharmaceuticals Inc. | 15.57% | 42.13% | 61.24% | 14.07% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 10.18% | 1.65% | 7.35% | 4.85% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.67% | 5.49% | 7.79% | 5.30% | — | |
Based on: 10-K (reporting date: 2025-12-28), 10-K (reporting date: 2024-12-29), 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
= 179,108 – 69,733 = 109,375
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 109,375 – 83,602 = 25,773
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 25,773 ÷ [(109,375 + 83,602) ÷ 2] = 26.71%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits considerable fluctuation over the observed period. Net operating assets demonstrate an initial decline followed by recovery and subsequent growth. A detailed examination of the accruals ratio and its components reveals noteworthy patterns.
- Net Operating Assets
- Net operating assets decreased from US$92,944 million in 2022 to US$75,179 million in 2023, representing a substantial reduction. A recovery was then observed in 2024, with net operating assets increasing to US$83,602 million. This upward trend continued into 2025, reaching US$109,375 million, surpassing the 2022 level.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals were positive in 2022, amounting to US$16,778 million. However, these accruals became significantly negative in 2023, reaching -US$17,765 million. A return to positive accruals occurred in 2024, with a value of US$8,423 million, and further increased to US$25,773 million in 2025.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio mirrored the trend in aggregate accruals. It stood at 19.84% in 2022, then decreased sharply to -21.13% in 2023. The ratio recovered to 10.61% in 2024 and increased substantially to 26.71% in 2025. The negative accruals ratio in 2023 suggests a reduction in reliance on accruals to generate earnings, or potentially, a realization of previously booked accruals. The increasing ratio in 2024 and 2025 indicates a growing proportion of earnings derived from accruals relative to net operating assets.
The significant swing in the accruals ratio warrants further investigation. The negative ratio in 2023, followed by a return to positive values and a substantial increase in 2025, could indicate changes in accounting practices, revenue recognition policies, or underlying economic factors impacting the business. The correlation between the decline and subsequent recovery in net operating assets and aggregate accruals suggests a potential relationship between operational performance and accrual patterns.
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Cash-Flow-Statement-Based Accruals Ratio
Johnson & Johnson, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 28, 2025 | Dec 29, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net earnings | 26,804) | 14,066) | 35,153) | 17,941) | 20,878) | |
| Less: Net cash flows from operating activities | 24,530) | 24,266) | 22,791) | 21,194) | 23,410) | |
| Less: Net cash (used by) from investing activities | (23,588) | (18,599) | 878) | (12,371) | (8,683) | |
| Cash-flow-statement-based aggregate accruals | 25,862) | 8,399) | 11,484) | 9,118) | 6,151) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 26.80% | 10.58% | 13.66% | 10.78% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -13.17% | 10.32% | -24.89% | -16.25% | — | |
| Amgen Inc. | -0.56% | -11.16% | 52.47% | 8.81% | — | |
| Bristol-Myers Squibb Co. | -5.49% | -4.97% | -5.99% | -9.10% | — | |
| Danaher Corp. | -2.47% | -1.25% | 8.20% | 1.44% | — | |
| Eli Lilly & Co. | 27.81% | 28.42% | 28.01% | 10.27% | — | |
| Gilead Sciences Inc. | 8.65% | -18.05% | -0.19% | -4.95% | — | |
| Merck & Co. Inc. | 19.75% | 5.00% | 2.23% | 0.61% | — | |
| Pfizer Inc. | -1.91% | -5.24% | 19.96% | 18.46% | — | |
| Regeneron Pharmaceuticals Inc. | 0.64% | 12.04% | 14.35% | 18.61% | — | |
| Thermo Fisher Scientific Inc. | 3.71% | 4.71% | 3.80% | -0.06% | — | |
| Vertex Pharmaceuticals Inc. | 11.22% | 43.34% | 62.03% | -14.45% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 6.42% | 2.07% | 9.68% | 2.52% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.65% | 4.00% | 8.59% | 4.25% | — | |
Based on: 10-K (reporting date: 2025-12-28), 10-K (reporting date: 2024-12-29), 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 × 25,862 ÷ [(109,375 + 83,602) ÷ 2] = 26.80%
2 Click competitor name to see calculations.
The information presents a review of net operating assets, cash-flow-statement-based aggregate accruals, and the resulting accruals ratio over a four-year period. A notable increase in the accruals ratio is observed, particularly in the most recent year presented.
- Net Operating Assets
- Net operating assets decreased from US$92,944 million in 2022 to US$75,179 million in 2023, representing a substantial decline. A partial recovery was seen in 2024, with assets reaching US$83,602 million, followed by further growth to US$109,375 million in 2025. This indicates a period of asset reduction followed by reinvestment or acquisition activity.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals increased from US$9,118 million in 2022 to US$11,484 million in 2023. Accruals then decreased to US$8,399 million in 2024 before experiencing a significant surge to US$25,862 million in 2025. This suggests a growing reliance on non-cash accounting to report earnings, especially in the final year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio exhibited an upward trend throughout the period. Starting at 10.78% in 2022, it rose to 13.66% in 2023 and 10.58% in 2024. The most significant change occurred in 2025, with the ratio reaching 26.80%. This substantial increase warrants further investigation, as a high accruals ratio can sometimes indicate potential earnings manipulation or aggressive accounting practices. The ratio’s movement does not directly correlate with the net operating assets, suggesting the change is driven by accruals rather than overall asset size.
The considerable increase in the accruals ratio in 2025, coupled with the substantial rise in aggregate accruals, should be examined closely. Further analysis is recommended to determine the underlying drivers of these changes and assess their impact on the quality of reported earnings.
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