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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McDonald’s Corp. pages available for free this week:
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Solvency Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
- Return on Assets (ROA) since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Sales (P/S) since 2005
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Balance-Sheet-Based Accruals Ratio
McDonald’s Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings and current maturities of long-term debt | ||||||
| Less: Current finance lease liability | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Less: Long-term finance lease liability | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Airbnb Inc. | ||||||
| Booking Holdings Inc. | ||||||
| Chipotle Mexican Grill Inc. | ||||||
| Starbucks Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The data reveals a consistent upward trend across all reported financial metrics from 2021 through 2024.
- Net Operating Assets
- This measure has steadily increased over the four-year period, starting at 26,313 million US dollars in 2021 and reaching 35,322 million US dollars by 2024. This represents a cumulative growth of approximately 34%, indicating an expansion in the company’s operational asset base.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibit a marked increase from 146 million US dollars in 2021 to 3,687 million US dollars in 2024. The growth over the period is substantial, denoting increasing non-cash components within the company’s accounting framework, which may impact earnings quality.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, moves from a low 0.56% in 2021 to 11.01% in 2024. This upward trajectory suggests that accruals constitute an increasing proportion of the net operating assets over the years. Such a trend often indicates a shift towards more aggressive revenue recognition or expense deferral practices.
Overall, the financial reporting quality measure exhibits rising accrual levels and ratios relative to net operating assets, alongside the growth in net operating assets themselves. This pattern suggests a notable change in the composition of earnings and asset reporting, warranting close monitoring for potential implications on earnings sustainability and the quality of financial reporting.
Cash-Flow-Statement-Based Accruals Ratio
McDonald’s Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Cash provided by operations | ||||||
| Less: Cash used for investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Airbnb Inc. | ||||||
| Booking Holdings Inc. | ||||||
| Chipotle Mexican Grill Inc. | ||||||
| Starbucks Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 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), 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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The data reveals notable trends in the financial reporting quality measures over the four-year period.
- Net Operating Assets
- The net operating assets have experienced a consistent upward trend, increasing from 26,313 million US dollars in 2021 to 35,322 million US dollars in 2024. This growth indicates an expansion in the company's net assets employed in operations, with an approximate increase of 34% over the period.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals derived from the cash flow statement show a significant increase, rising from 569 million US dollars in 2021 to 4,122 million US dollars in 2024. This suggests a considerable growth in non-cash components affecting earnings, with the amount in 2024 being over seven times the value recorded in 2021.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, representing aggregate accruals as a percentage of net operating assets, exhibits a marked increase from 2.17% in 2021 to 12.31% in 2024. This trend underscores an increasing proportion of accruals relative to net operating assets, which may imply a growing reliance on non-cash earnings components within the company's financial reporting.
Overall, the data illustrates a pattern of expanding net operating assets accompanied by a disproportionately larger increase in accruals and their ratio, suggesting a shift in the composition of reported earnings. This trend warrants careful consideration, as higher accruals relative to net operating assets can sometimes indicate increased earnings management or changes in accounting policies impacting financial reporting quality.