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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Procter & Gamble Co. pages available for free this week:
- Statement of Comprehensive Income
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Geographic Areas
- Price to FCFE (P/FCFE)
- Net Profit Margin since 2005
- Operating Profit Margin since 2005
- Current Ratio since 2005
- Debt to Equity since 2005
- Price to Earnings (P/E) since 2005
- Price to Sales (P/S) since 2005
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Balance-Sheet-Based Accruals Ratio
Procter & Gamble Co., balance sheet computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-06-30), 10-K (reporting date: 2024-06-30), 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
The financial data reveals patterns in Procter & Gamble Co.'s net operating assets and accrual measures over a five-year period ending June 30, 2025.
- Net Operating Assets
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There is a consistent upward trend in net operating assets from 68,354 million US dollars in 2021 to 77,237 million US dollars in 2025. The growth appears steady each year, reflecting gradual asset accumulation or operational expansion over time.
- Balance-Sheet-Based Aggregate Accruals
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This measure varies notably across the years. Starting at 2,937 million US dollars in 2021, it declines moderately to 2,293 million in 2023 but then dramatically drops to 111 million in 2024. In the final year observed, 2025, there is a sharp increase back to 3,700 million. This fluctuation suggests significant changes in accrual accounting practices or operational results impacting accrual estimates during these periods.
- Balance-Sheet-Based Accruals Ratio
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The accruals ratio shows a declining trend from 4.39% in 2021 to a low point of 0.15% in 2024, after which it rises sharply to 4.91% in 2025. This pattern mirrors the aggregate accruals movement proportionate to net operating assets. The low ratio in 2024 points to minimal accrual-based adjustments relative to assets, while the abrupt increase in 2025 indicates a reversal or an unusual change in accruals relative to the asset base.
Overall, the data indicates stable growth in net operating assets with noticeable volatility in accrual figures, particularly in the years 2024 and 2025. Such fluctuations in accrual-related metrics could warrant further examination to understand the underlying causes affecting financial reporting quality during these periods.
Cash-Flow-Statement-Based Accruals Ratio
Procter & Gamble Co., cash flow statement computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-06-30), 10-K (reporting date: 2024-06-30), 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
The analysis of the financial data over the five-year period reveals notable trends in net operating assets and cash-flow-statement-based accruals for the company.
- Net Operating Assets
- There is a consistent upward trajectory in net operating assets from 68,354 million US dollars in 2021 to 77,237 million US dollars in 2025. The growth is steady each year, though the annual increment varies slightly, indicating ongoing asset expansion or acquisitions contributing positively to the company's operating base.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit volatility throughout the observed periods. Starting with a negative value of -1,231 million US dollars in 2021, there is a sharp increase to 2,443 million in 2022, followed by a drop back to 1,305 million in 2023. The accruals then decline to -1,463 million in 2024 before rising again to 1,975 million in 2025. This fluctuation suggests variability in the timing differences between cash flows and accounting income, indicating irregular accrual adjustments year-over-year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the pattern observed in aggregate accruals. It fluctuates between negative and positive values, beginning at -1.84% in 2021 and rising sharply to 3.5% in 2022. It then decreases to 1.81% in 2023, drops further to -1.99% in 2024, and again climbs to 2.62% in 2025. These oscillations imply inconsistent accrual quality, with the negative ratios potentially signaling periods of earnings management or adjustments that detract from cash flow quality.
Overall, while net operating assets show steady growth, the accruals figures and ratios present considerable fluctuations that may warrant further investigation into their underlying causes and implications for earnings quality.