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 29, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 180,104) | 167,558) | 187,378) | 182,018) | 174,894) | |
| Less: Cash and cash equivalents | 24,105) | 21,859) | 14,127) | 14,487) | 13,985) | |
| Less: Marketable securities | 417) | 1,068) | 9,392) | 17,121) | 11,200) | |
| Operating assets | 155,582) | 144,631) | 163,859) | 150,410) | 149,709) | |
| Operating Liabilities | ||||||
| Total liabilities | 108,614) | 98,784) | 110,574) | 107,995) | 111,616) | |
| Less: Loans and notes payable | 5,983) | 3,451) | 12,771) | 3,766) | 2,631) | |
| Less: Long-term debt, excluding current portion | 30,651) | 25,881) | 26,888) | 29,985) | 32,635) | |
| Operating liabilities | 71,980) | 69,452) | 70,915) | 74,244) | 76,350) | |
| Net operating assets1 | 83,602) | 75,179) | 92,944) | 76,166) | 73,359) | |
| Balance-sheet-based aggregate accruals2 | 8,423) | (17,765) | 16,778) | 2,807) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 10.61% | -21.13% | 19.84% | 3.75% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | 13.10% | -22.39% | -14.27% | -9.69% | — | |
| Amgen Inc. | -10.36% | 57.08% | 4.07% | 0.70% | — | |
| Bristol-Myers Squibb Co. | -3.21% | -7.12% | -3.86% | -13.40% | — | |
| Danaher Corp. | -3.94% | 3.48% | -1.55% | 16.41% | — | |
| Eli Lilly & Co. | 29.18% | 28.84% | 11.38% | 16.60% | — | |
| Gilead Sciences Inc. | -11.79% | 1.04% | -2.92% | -2.34% | — | |
| Merck & Co. Inc. | 6.20% | 3.16% | 0.46% | 25.14% | — | |
| Pfizer Inc. | -11.48% | 30.66% | 24.95% | -7.11% | — | |
| Regeneron Pharmaceuticals Inc. | 25.51% | 1.17% | 11.07% | 43.54% | — | |
| Thermo Fisher Scientific Inc. | 2.28% | 4.96% | -1.78% | 43.38% | — | |
| Vertex Pharmaceuticals Inc. | 42.13% | 61.24% | 14.07% | 18.20% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 1.64% | 7.36% | 4.84% | 6.18% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.49% | 7.80% | 5.29% | 5.94% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 155,582 – 71,980 = 83,602
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 83,602 – 75,179 = 8,423
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 8,423 ÷ [(83,602 + 75,179) ÷ 2] = 10.61%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated variability over the analyzed period. An increase was observed from 76,166 million US dollars in 2021 to 92,944 million US dollars in 2022, indicating an expansion in operating assets. However, in 2023, there was a notable decline to 75,179 million US dollars, followed by a partial recovery to 83,602 million US dollars in 2024. The data suggest fluctuations in the company's investment in operating assets over the years.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibited significant volatility. Starting at 2,807 million US dollars in 2021, they surged dramatically to 16,778 million US dollars in 2022. A pronounced reversal occurred in 2023 with a negative value of -17,765 million US dollars, indicating a possible write-down or reversal of previous accruals. The value returned to positive territory in 2024, reaching 8,423 million US dollars. This pattern suggests inconsistency in accrual accounting components, which may affect earnings quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, which expresses aggregate accruals relative to net operating assets, reflected heightened volatility and potential risks in earnings quality. The ratio increased sharply from 3.75% in 2021 to 19.84% in 2022, indicating a higher proportion of accruals relative to operating assets. This was followed by a significant negative ratio of -21.13% in 2023, consistent with the negative aggregate accruals, suggesting an unusual accounting adjustment or correction. In 2024, the ratio rose again to 10.61%, marking a return towards positive accrual levels but remaining elevated compared to 2021. These fluctuations imply variability in accruals that could impact the reliability of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
Johnson & Johnson, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 29, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net earnings | 14,066) | 35,153) | 17,941) | 20,878) | 14,714) | |
| Less: Net cash flows from operating activities | 24,266) | 22,791) | 21,194) | 23,410) | 23,536) | |
| Less: Net cash (used by) from investing activities | (18,599) | 878) | (12,371) | (8,683) | (20,825) | |
| Cash-flow-statement-based aggregate accruals | 8,399) | 11,484) | 9,118) | 6,151) | 12,003) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 10.58% | 13.66% | 10.78% | 8.23% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | 10.32% | -24.89% | -16.25% | -10.28% | — | |
| Amgen Inc. | -11.16% | 52.47% | 8.81% | -12.87% | — | |
| Bristol-Myers Squibb Co. | -4.97% | -5.99% | -9.10% | -12.73% | — | |
| Danaher Corp. | -1.25% | 8.20% | 1.44% | 18.48% | — | |
| Eli Lilly & Co. | 28.52% | 28.13% | 10.32% | 5.30% | — | |
| Gilead Sciences Inc. | -18.05% | -0.19% | -4.95% | -4.86% | — | |
| Merck & Co. Inc. | 5.00% | 2.23% | 0.61% | 29.09% | — | |
| Pfizer Inc. | -5.24% | 19.96% | 18.46% | 13.18% | — | |
| Regeneron Pharmaceuticals Inc. | 12.04% | 14.35% | 18.61% | 49.24% | — | |
| Thermo Fisher Scientific Inc. | 4.71% | 3.80% | -0.06% | 34.69% | — | |
| Vertex Pharmaceuticals Inc. | 43.34% | 62.03% | -14.45% | 1.38% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2.07% | 9.68% | 2.52% | 8.19% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.00% | 8.59% | 4.25% | 7.53% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 8,399 ÷ [(83,602 + 75,179) ÷ 2] = 10.58%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed variability over the analyzed periods. Initially, there was an increase from approximately 76,166 million US dollars at the end of 2021 to 92,944 million at the end of 2022. Subsequently, a noticeable decline occurred in 2023, bringing the figure down to 75,179 million. The value showed a recovery in 2024, rising to 83,602 million. This pattern suggests some fluctuation in the company's investment in operating assets over the years, with a peak in 2022 followed by a decrease and partial rebound.
- Cash-flow-Statement-Based Aggregate Accruals
- The aggregate accruals based on the cash flow statement demonstrated a general upward trend from 2021 through 2023, increasing from 6,151 million US dollars in 2021 to a peak of 11,484 million in 2023. However, in 2024, there was a decline to 8,399 million, indicating a reduction in aggregate accruals after the 2023 high. This suggests variability in earnings quality and possible changes in accrual management or operational cash flow dynamics over the period.
- Cash-flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, increased consistently from 8.23% in 2021 to 13.66% in 2023, reflecting a growing proportion of accruals relative to net operating assets or a related base. In 2024, this ratio decreased to 10.58%, indicating an improvement in the quality of earnings compared to the previous year. The initial rising trend might imply increasing earnings management or changes in cash flow patterns, whereas the latest decrease could signal a normalization or improvement in financial reporting quality.