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
Merck & Co. Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 136,866) | 117,106) | 106,675) | 109,160) | 105,694) | |
| Less: Cash and cash equivalents | 14,565) | 13,242) | 6,841) | 12,694) | 8,096) | |
| Less: Short-term investments | —) | 447) | 252) | 498) | —) | |
| Operating assets | 122,301) | 103,417) | 99,582) | 95,968) | 97,598) | |
| Operating Liabilities | ||||||
| Total liabilities | 84,204) | 70,734) | 69,040) | 63,102) | 67,437) | |
| Less: Loans payable and current portion of long-term debt | 2,589) | 2,649) | 1,372) | 1,946) | 2,412) | |
| Less: Long-term debt, excluding current portion | 46,750) | 34,462) | 33,683) | 28,745) | 30,690) | |
| Operating liabilities | 34,865) | 33,623) | 33,985) | 32,411) | 34,335) | |
| Net operating assets1 | 87,436) | 69,794) | 65,597) | 63,557) | 63,263) | |
| Balance-sheet-based aggregate accruals2 | 17,642) | 4,197) | 2,040) | 294) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 22.44% | 6.20% | 3.16% | 0.46% | — | |
| 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% | — | |
| Johnson & Johnson | 26.71% | 10.61% | -21.13% | 19.84% | — | |
| 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: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 122,301 – 34,865 = 87,436
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 87,436 – 69,794 = 17,642
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 17,642 ÷ [(87,436 + 69,794) ÷ 2] = 22.44%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits a markedly increasing trend over the observed period. Initially low, the ratio demonstrates substantial growth, suggesting a potential shift in the relationship between reported earnings and underlying cash flows.
- Net Operating Assets
- Net operating assets consistently increased throughout the period, rising from US$63,557 million in 2022 to US$87,436 million in 2025. This indicates overall business expansion and asset accumulation.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals show a significant upward trajectory. Starting at US$294 million in 2022, accruals escalate to US$17,642 million by 2025. This substantial increase warrants further investigation as it could indicate increasing reliance on accrual accounting to manage reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio begins at 0.46% in 2022 and experiences rapid growth, reaching 3.16% in 2023, 6.20% in 2024, and culminating at 22.44% in 2025. This escalating ratio suggests a growing proportion of reported earnings are derived from accruals rather than cash flows. A ratio exceeding 10% is often considered a potential indicator of increased earnings management risk, and the value in 2025 significantly surpasses this threshold. The trend suggests a potential deterioration in the quality of reported earnings, although further analysis considering industry benchmarks and company-specific factors is necessary to draw definitive conclusions.
The combined trends indicate a growing divergence between reported earnings and cash flows. The substantial increase in both aggregate accruals and the accruals ratio necessitates a deeper examination of the underlying accounting practices and potential motivations for the observed patterns.
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Cash-Flow-Statement-Based Accruals Ratio
Merck & Co. Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Merck & Co., Inc. | 18,254) | 17,117) | 365) | 14,519) | 13,049) | |
| Less: Net cash provided by operating activities | 16,472) | 21,468) | 13,006) | 19,095) | 13,122) | |
| Less: Net cash used in investing activities | (13,741) | (7,734) | (14,083) | (4,960) | (16,421) | |
| Cash-flow-statement-based aggregate accruals | 15,523) | 3,383) | 1,442) | 384) | 16,348) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 19.75% | 5.00% | 2.23% | 0.61% | — | |
| 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% | — | |
| Johnson & Johnson | 26.80% | 10.58% | 13.66% | 10.78% | — | |
| 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: 2025-12-31), 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).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 15,523 ÷ [(87,436 + 69,794) ÷ 2] = 19.75%
2 Click competitor name to see calculations.
The information presents a notable upward trend in cash-flow-statement-based aggregate accruals and the corresponding accruals ratio over the four-year period. Net operating assets also demonstrate consistent growth, though at a less dramatic pace than accruals.
- Net Operating Assets
- Net operating assets increased from US$63,557 million in 2022 to US$87,436 million in 2025. This represents a cumulative increase of approximately 37.6% over the period. The growth appears relatively steady, with incremental increases each year.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals experienced a substantial increase, rising from US$384 million in 2022 to US$15,523 million in 2025. This signifies a roughly 4042% increase over the four years. The increase is particularly pronounced between 2023 and 2024, and again between 2024 and 2025, suggesting accelerating accruals activity.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio exhibits a parallel upward trajectory, moving from 0.61% in 2022 to 19.75% in 2025. This represents a significant increase in the proportion of reported earnings attributable to accruals rather than cash flow. The ratio more than tripled between 2022 and 2023, and continued to climb rapidly in subsequent years. A ratio of nearly 20% in 2025 warrants further investigation to understand the underlying drivers and potential implications for earnings quality.
The divergence between the growth in net operating assets and the exponential increase in accruals and the accruals ratio suggests a potential shift in the company’s earnings generation pattern. While operating assets are growing, a larger portion of reported profitability is becoming reliant on accruals. This trend should be examined further to assess the sustainability of earnings and the potential for future reversals.
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