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
Time Warner Cable Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 49,277) | 48,501) | 48,273) | 49,809) | 48,276) | |
| Less: Cash and equivalents | 1,170) | 707) | 525) | 3,304) | 5,177) | |
| Less: Short-term investments in U.S. Treasury securities | —) | —) | —) | 150) | —) | |
| Operating assets | 48,107) | 47,794) | 47,748) | 46,355) | 43,099) | |
| Operating Liabilities | ||||||
| Total liabilities | 40,278) | 40,484) | 41,326) | 42,526) | 40,739) | |
| Less: Current maturities of long-term debt | 5) | 1,017) | 1,767) | 1,518) | 2,122) | |
| Less: Long-term debt, excluding current maturities | 22,497) | 22,701) | 23,285) | 25,171) | 24,320) | |
| Operating liabilities | 17,776) | 16,766) | 16,274) | 15,837) | 14,297) | |
| Net operating assets1 | 30,331) | 31,028) | 31,474) | 30,518) | 28,802) | |
| Balance-sheet-based aggregate accruals2 | (697) | (446) | 956) | 1,716) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -2.27% | -1.43% | 3.08% | 5.79% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= 48,107 – 17,776 = 30,331
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 30,331 – 31,028 = -697
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -697 ÷ [(30,331 + 31,028) ÷ 2] = -2.27%
4 Click competitor name to see calculations.
A consistent downward trend is observed in the balance-sheet-based accruals ratio from 2012 to 2015, reflecting a significant shift in the relationship between reported earnings and cash flows.
- Net Operating Assets
- Net operating assets remained relatively stable over the four-year period, peaking at 31,474 million US dollars in 2013 before marginally decreasing to 30,331 million US dollars by the end of 2015. The lack of significant volatility in the asset base suggests that the fluctuations in the accruals ratio are primarily driven by changes in the aggregate accruals themselves.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals experienced a substantial decline, transitioning from a positive 1,716 million US dollars in 2012 to a negative 697 million US dollars in 2015. A critical inflection point occurred between 2013 and 2014, when the value shifted from 956 million US dollars to -446 million US dollars, indicating a reversal in the composition of earnings relative to cash flow.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio followed a corresponding decline, moving from 5.79% in 2012 to -2.27% in 2015. The movement from a positive to a negative ratio indicates that reported accounting earnings were initially higher than cash flows but eventually became lower than cash flows. This trend is typically interpreted as an increase in the quality of financial reporting, suggesting a shift toward more conservative accounting practices over the analyzed period.
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Cash-Flow-Statement-Based Accruals Ratio
Time Warner Cable Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income attributable to TWC shareholders | 1,844) | 2,031) | 1,954) | 2,155) | 1,665) | |
| Less: Cash provided by operating activities | 6,539) | 6,350) | 5,753) | 5,525) | 5,688) | |
| Less: Cash used by investing activities | (4,345) | (4,092) | (3,476) | (3,345) | (3,530) | |
| Cash-flow-statement-based aggregate accruals | (350) | (227) | (323) | (25) | (493) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.14% | -0.73% | -1.04% | -0.08% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -350 ÷ [(30,331 + 31,028) ÷ 2] = -1.14%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2012 to 2015 reveals a consistent pattern of negative cash-flow-statement-based aggregate accruals. This condition indicates that cash flows from operations consistently exceeded accrual-based earnings during the period, which is typically associated with high earnings quality and conservative accounting practices.
- Net Operating Assets
- Net operating assets remained relatively stable over the four-year period, fluctuating within a narrow range between 30,331 million USD and 31,474 million USD. A slight peak occurred in 2013, followed by a gradual decline through 2015, suggesting a consistent scale of the operational asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals were negative in every year analyzed. The magnitude of these negative accruals increased significantly from -25 million USD in 2012 to -323 million USD in 2013. Despite a moderate recovery to -227 million USD in 2014, the value declined further to -350 million USD by the end of 2015, marking the highest level of negative accruals in the series.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend of the aggregate accruals, remaining negative throughout the period. The ratio shifted from a near-neutral -0.08% in 2012 to -1.04% in 2013. While the ratio improved slightly to -0.73% in 2014, it reached its lowest point of -1.14% in 2015. The persistence of a negative ratio suggests that the company's reported earnings were consistently backed by cash inflows.
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