Financial Reporting Quality: Aggregate Accruals

Difficulty level: Advanced

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

Target Corp., balance sheet computation of aggregate accruals

USD $ in millions

 
Jan 31, 2015 Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Jan 29, 2011 Jan 30, 2010
Operating Assets
Total assets 41,404  44,553  48,163  46,630  43,705  44,533 
Less: Cash and cash equivalents 690  692  654  600  583  583 
Less: Short-term investments 1,520  130  194  1,129  1,617 
Operating assets 39,194  43,858  47,379  45,836  41,993  42,333 
Operating Liabilities
Total liabilities 27,407  28,322  31,605  30,809  28,218  29,186 
Less: Current portion of long-term debt and other borrowings 91  1,160  2,994  3,786  119  1,696 
Less: Long-term debt and other borrowings, excluding current portion 12,705  12,622  14,654  13,697  15,607  15,118 
Operating liabilities 14,611  14,540  13,957  13,326  12,492  12,372 
Net operating assets1 24,583  29,318  33,422  32,510  29,501  29,961 
Balance-sheet-based aggregate accruals2 (4,735) (4,104) 912  3,009  (460)
Ratio
Balance-sheet-based accruals ratio3 -17.57% -13.08% 2.77% 9.70% -1.55% –%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Amazon.com Inc. –% 76.27% 84.67% 173.74% –% –%
Wal-Mart Stores Inc. -3.86% 2.74% 4.43% 7.52% 6.77% –%
Balance-Sheet-Based Accruals Ratio, Sector
Broadline Retailers –% 2.77% 5.56% 8.98% 5.85% –%
Balance-Sheet-Based Accruals Ratio, Industry
Consumer Services –% 3.89% 3.68% 3.20% 9.99% –%

2015 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 39,194 – 14,611 = 24,583

2 Balance-sheet-based aggregate accruals = Net operating assets 2015 – Net operating assets 2014
= 24,583 – 29,318 = -4,735

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -4,735 ÷ [(24,583 + 29,318) ÷ 2] = -17.57%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Target Corp. deteriorated earnings quality from 2014 to 2015.

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Cash-Flow-Statement-Based Accruals Ratio

Target Corp., cash flow statement computation of aggregate accruals

USD $ in millions

 
Jan 31, 2015 Feb 1, 2014 Feb 2, 2013 Jan 28, 2012 Jan 29, 2011 Jan 30, 2010
Net earnings (loss) (1,636) 1,971  2,999  2,929  2,920  2,488 
Less: Cash provided by operations 5,131  6,520  5,325  5,434  5,271  5,881 
Less: Cash required for investing activities (1,605) (271) (2,855) (4,180) (1,744) (1,703)
Cash-flow-statement-based aggregate accruals (5,162) (4,278) 529  1,675  (607) (1,690)
Ratio
Cash-flow-statement-based accruals ratio1 -19.15% -13.64% 1.60% 5.40% -2.04% –%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Amazon.com Inc. –% -29.61% -31.23% -68.27% –% –%
Wal-Mart Stores Inc. -0.83% 3.88% 3.19% 6.79% 4.47% –%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Broadline Retailers –% -0.73% 2.24% 6.05% 2.14% –%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Consumer Services –% 0.84% 3.10% 1.80% 2.42% –%

2015 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -5,162 ÷ [(24,583 + 29,318) ÷ 2] = -19.15%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Target Corp. deteriorated earnings quality from 2014 to 2015.

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