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
Motorola Solutions Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 13,336) | 12,814) | 12,189) | 10,876) | 10,642) | |
| Less: Cash and cash equivalents | 1,705) | 1,325) | 1,874) | 1,254) | 1,001) | |
| Operating assets | 11,631) | 11,489) | 10,315) | 9,622) | 9,641) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,597) | 12,683) | 12,212) | 11,417) | 11,325) | |
| Less: Current portion of long-term debt | 1,313) | 1) | 5) | 12) | 16) | |
| Less: Long-term debt, excluding current portion | 4,705) | 6,013) | 5,688) | 5,163) | 5,113) | |
| Operating liabilities | 6,579) | 6,669) | 6,519) | 6,242) | 6,196) | |
| Net operating assets1 | 5,052) | 4,820) | 3,796) | 3,380) | 3,445) | |
| Balance-sheet-based aggregate accruals2 | 232) | 1,024) | 416) | (65) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.70% | 23.77% | 11.59% | -1.90% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | -9.04% | -2.12% | — | — | — | |
| Arista Networks Inc. | 17.14% | 106.22% | — | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | — | — | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | — | — | — | |
| Lumentum Holdings Inc. | 56.73% | -0.44% | — | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -6.32% | -13.26% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.81% | 19.09% | 200.00% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 11,631 – 6,579 = 5,052
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 5,052 – 4,820 = 232
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 232 ÷ [(5,052 + 4,820) ÷ 2] = 4.70%
4 Click competitor name to see calculations.
Analysis of the balance-sheet-based accruals reveals a period of expansion in asset scale accompanied by significant fluctuations in the relationship between accounting earnings and cash flows.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from US$ 3,380 million in 2020 to US$ 5,052 million in 2023. This steady growth indicates a continuous expansion of the operating asset base over the analyzed period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited substantial volatility. After recording a negative value of US$ 65 million in 2020, accruals rose sharply to a peak of US$ 1,024 million in 2022, before declining significantly to US$ 232 million by the end of 2023.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio closely mirrored the volatility of the aggregate accruals. The ratio shifted from -1.90% in 2020 to a peak of 23.77% in 2022, suggesting a period where reported accounting earnings diverged significantly from cash flow relative to the asset base. The subsequent sharp decline to 4.70% in 2023 indicates a correction and a realignment, suggesting that earnings quality improved as reported profits became more closely supported by cash flows.
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Cash-Flow-Statement-Based Accruals Ratio
Motorola Solutions Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net earnings attributable to Motorola Solutions, Inc. | 1,709) | 1,363) | 1,245) | 949) | 868) | |
| Less: Net cash provided by operating activities | 2,044) | 1,823) | 1,837) | 1,613) | 1,823) | |
| Less: Net cash used for investing activities | (414) | (1,387) | (742) | (437) | (934) | |
| Cash-flow-statement-based aggregate accruals | 79) | 927) | 150) | (227) | (21) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.60% | 21.52% | 4.18% | -6.65% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | -14.62% | 0.00% | — | — | — | |
| Arista Networks Inc. | 36.37% | 52.90% | — | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | — | — | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | — | — | — | |
| Lumentum Holdings Inc. | 33.53% | -2.83% | — | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -9.60% | -4.09% | -1.64% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 79 ÷ [(5,052 + 4,820) ÷ 2] = 1.60%
2 Click competitor name to see calculations.
The analysis of financial reporting quality reveals a steady expansion of the asset base coupled with significant volatility in aggregate accruals over the four-year period ending December 31, 2023. While net operating assets grew consistently, the relationship between accruals and these assets fluctuated, reaching a peak in 2022 before normalizing in 2023.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from US$ 3,380 million in 2020 to US$ 5,052 million in 2023. This represents a sustained growth in the scale of operating resources over the analyzed period.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited substantial variance. The figures shifted from a negative US$ 227 million in 2020 to a peak of US$ 927 million in 2022, followed by a sharp contraction to US$ 79 million in 2023.
- Accruals Ratio and Earnings Quality
- The cash-flow-statement-based accruals ratio mirrored the volatility of the aggregate accruals, moving from -6.65% in 2020 to 4.18% in 2021. A significant spike to 21.52% occurred in 2022, indicating a period where reported earnings were considerably higher than the cash flows generated from operations. The subsequent decline to 1.60% in 2023 suggests a correction and a return to a higher degree of alignment between accrual-based earnings and actual cash flow.
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