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 Income Statement
- Analysis of Profitability Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2005
- Current Ratio since 2005
- Total Asset Turnover since 2005
- Analysis of Debt
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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. | ||||||
| DoorDash, 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.
Net operating assets exhibited a consistent upward trend over the four-year period, increasing from US$26,313 million in 2021 to US$35,322 million in 2024. Simultaneously, balance-sheet-based aggregate accruals demonstrated a substantial and accelerating increase. This resulted in a corresponding rise in the balance-sheet-based accruals ratio.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals were relatively low in 2021 at US$146 million. However, a significant surge occurred in 2022, reaching US$2,325 million. This upward momentum continued in subsequent years, with accruals reaching US$2,997 million in 2023 and further increasing to US$3,687 million in 2024. The magnitude of the increase from 2021 to 2024 is considerable.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio mirrored the trend in aggregate accruals. Starting at 0.56% in 2021, the ratio increased dramatically to 8.46% in 2022. Further increases were observed in 2023 (9.94%) and 2024 (11.01%). The ratio more than doubled between 2021 and 2022, and continued to climb, albeit at a decreasing rate, through 2024. This suggests a growing proportion of net operating assets are funded by accruals rather than cash flow.
The observed trends suggest a potential shift in the company’s financing or accounting practices. The increasing accruals ratio warrants further investigation to determine the underlying drivers and assess any potential implications for the quality of reported earnings. A sustained increase in accruals relative to operating assets could indicate aggressive revenue recognition or delayed expense recognition, although further analysis is required to confirm this.
Cash-Flow-Statement-Based Accruals Ratio
McDonald’s Corp., cash flow statement computation of aggregate accruals
US$ 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. | ||||||
| DoorDash, 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.