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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Raytheon Co. pages available for free this week:
- Balance Sheet: Assets
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Income Statement
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Analysis of Reportable Segments
- Selected Financial Data since 2005
- Operating Profit Margin since 2005
- Return on Assets (ROA) since 2005
- Price to Earnings (P/E) since 2005
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Balance-Sheet-Based Accruals Ratio
Raytheon Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Commercial paper and current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= – =
3 2019 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
- The net operating assets exhibited moderate fluctuations over the four-year period. Starting at 12,447 million USD in 2016, there was a slight decline in 2017 to 12,125 million USD, followed by an increase to 13,330 million USD in 2018. This peak was succeeded by a decline to 12,723 million USD in 2019. Overall, the values indicate relative stability with modest year-to-year variations.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals showed significant volatility across the reported years. In 2016 and 2017, the accruals were negative, indicating possible conservative accrual accounting or reversals, with values of -368 million USD and -322 million USD respectively. In 2018, a marked shift occurred, with accruals turning positive to 1,205 million USD, indicating an increase in accrued assets or reduction in accrued liabilities. This positive spike reversed in 2019, with accruals returning to a negative figure of -607 million USD. Such fluctuations suggest variability in accrual management or underlying operational factors influencing accruals.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the direction and volatility of aggregate accruals, moving from negative percentages in 2016 (-2.91%) and 2017 (-2.62%) to a pronounced positive ratio in 2018 (9.47%), before declining again to a negative value in 2019 (-4.66%). This pattern reinforces the observation of considerable shifts in accrual accounting practices or in operational outcomes impacting accrual calculations. The large positive spike in 2018 particularly stands out as an anomaly compared to the surrounding years.
Cash-Flow-Statement-Based Accruals Ratio
Raytheon Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Raytheon Company | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 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 analysis of the annual financial reporting quality measures reveals notable fluctuations and trends over the four-year period.
- Net Operating Assets
- The net operating assets exhibit a modest overall increase from US$12,447 million in 2016 to US$13,330 million in 2018, followed by a decrease to US$12,723 million in 2019. This suggests a general growth in operating asset base through 2018, with a slight contraction in the last reported year.
- Cash-Flow-Statement-Based Aggregate Accruals
- The cash-flow-based aggregate accruals demonstrate considerable volatility. In 2016, the value was significantly negative at -US$694 million, indicating a large negative accrual component relative to cash flows. The figure shifts to US$94 million in 2017, nearly zero at US$2 million in 2018, and then declines again to -US$133 million in 2019. This pattern indicates fluctuating accrual management, transitioning from negative to positive and back to negative values across the period.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio aligns with the aggregate accruals trend, moving from -5.49% in 2016 to a small positive 0.77% in 2017. The ratio nearly nullifies to 0.02% in 2018 before dropping again to -1.02% in 2019. These oscillations suggest inconsistent accrual behavior, with the ratio generally approaching zero in the middle years, indicative of better alignment between accruals and cash flows during that time.
Overall, the data points to a pattern of variability in accruals-related measures, which can imply fluctuations in earnings quality or changes in accounting and operational management strategies. The positive movement toward near zero accrual ratios in 2017 and 2018 indicates potentially higher quality reporting in those years, whereas the negative values in 2016 and 2019 may suggest less quality in financial reporting due to more aggressive or less stable accruals.