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
McKesson Corp., balance sheet computation of aggregate accruals
US$ in millions
| Mar 31, 2016 | Mar 31, 2015 | Mar 31, 2014 | Mar 31, 2013 | Mar 31, 2012 | Mar 31, 2011 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 56,563) | 53,870) | 51,759) | 34,786) | 33,093) | 30,886) | |
| Less: Cash and cash equivalents | 4,048) | 5,341) | 4,193) | 2,456) | 3,149) | 3,612) | |
| Operating assets | 52,515) | 48,529) | 47,566) | 32,330) | 29,944) | 27,274) | |
| Operating Liabilities | |||||||
| Total liabilities | 46,149) | 44,399) | 41,441) | 27,716) | 26,262) | 23,666) | |
| Less: Short-term borrowings | 7) | 135) | 346) | —) | 400) | —) | |
| Less: Current portion of long-term debt | 1,612) | 1,529) | 1,424) | 352) | 508) | 417) | |
| Less: Long-term debt, excluding current portion | 6,535) | 8,180) | 8,949) | 4,521) | 3,072) | 3,587) | |
| Operating liabilities | 37,995) | 34,555) | 30,722) | 22,843) | 22,282) | 19,662) | |
| Net operating assets1 | 14,520) | 13,974) | 16,844) | 9,487) | 7,662) | 7,612) | |
| Balance-sheet-based aggregate accruals2 | 546) | (2,870) | 7,357) | 1,825) | 50) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 3.83% | -18.63% | 55.88% | 21.28% | 0.65% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Abbott Laboratories | — | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
Net operating assets = Operating assets – Operating liabilities
= 52,515 – 37,995 = 14,520
2 2016 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2016 – Net operating assets2015
= 14,520 – 13,974 = 546
3 2016 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 546 ÷ [(14,520 + 13,974) ÷ 2] = 3.83%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit a general upward trend from 2012 to 2016. Beginning at 7,662 million US dollars in 2012, there is a marked increase to 9,487 million in 2013 and a pronounced jump to 16,844 million in 2014. After a decrease to 13,974 million in 2015, the figure slightly rises again to 14,520 million in 2016. This indicates growth in operating assets overall, with some volatility particularly noted between 2014 and 2015.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show significant variability across the five-year period. Starting at 50 million US dollars in 2012, they dramatically increase to 1,825 million in 2013 and then surge further to 7,357 million in 2014. This is followed by a sharp decline to negative 2,870 million in 2015, before recovering to 546 million in 2016. The fluctuations suggest considerable changes in accrual accounting components, reflecting potential shifts in earnings quality or accounting policies.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the high volatility of the aggregate accruals. Initially low at 0.65% in 2012, the ratio climbs substantially to 21.28% in 2013 and reaches a peak of 55.88% in 2014. It then drops steeply to negative 18.63% in 2015, followed by a moderate increase to 3.83% in 2016. These swings in the ratio indicate considerable variability in the proportion of accruals relative to net operating assets, which may impact the reliability and quality of reported earnings during these years.
Cash-Flow-Statement-Based Accruals Ratio
McKesson Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Mar 31, 2016 | Mar 31, 2015 | Mar 31, 2014 | Mar 31, 2013 | Mar 31, 2012 | Mar 31, 2011 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to McKesson Corporation | 2,258) | 1,476) | 1,263) | 1,338) | 1,403) | 1,202) | |
| Less: Net cash provided by operating activities | 3,672) | 3,112) | 3,136) | 2,483) | 2,950) | 2,338) | |
| Less: Net cash used in investing activities | (1,557) | (677) | (5,046) | (2,209) | (1,502) | (624) | |
| Cash-flow-statement-based aggregate accruals | 143) | (959) | 3,173) | 1,064) | (45) | (512) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 1.00% | -6.22% | 24.10% | 12.41% | -0.59% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Abbott Laboratories | — | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 143 ÷ [(14,520 + 13,974) ÷ 2] = 1.00%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a substantial increase from 7,662 million US dollars in 2012 to 9,487 million in 2013. This growth trend intensified sharply in 2014, with the figure reaching 16,844 million, marking a significant expansion. Subsequently, there was a decline in 2015 to 13,974 million, followed by a slight rise in 2016 to 14,520 million. Overall, the trend shows considerable volatility with an overall upward trajectory across the five-year period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals as reported in the cash flow statement were negative in 2012 at -45 million US dollars, indicating a net cash outflow relative to accrual accounting at that time. In 2013 and 2014, these accruals rose sharply to 1,064 million and 3,173 million respectively, evidencing an increasing level of accrual-based adjustments. However, in 2015, the trend reversed markedly with a negative value of -959 million, showing a return to net cash outflow in terms of accruals. A positive, though much lower, figure of 143 million was observed in 2016. This pattern indicates substantial fluctuations in accrual adjustments over the years, impacting the quality signals provided by cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio moved from negative territory (-0.59%) in 2012 to a sharp positive increase in 2013 (12.41%) and peaked in 2014 at 24.1%. This denotes a period where accruals formed an increasingly larger proportion of net operating assets, potentially indicating higher earnings manipulation or timing differences. Notably, this ratio fell to -6.22% in 2015, showing a substantial reversal when accruals were less than operating assets or even negative in relation to them. In 2016, the ratio stabilized at a low positive figure of 1%, suggesting normalization towards a balanced accrual environment.