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
Union Pacific Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 69,698) | 67,715) | 67,132) | 65,449) | 63,525) | |
| Less: Cash and cash equivalents | 1,266) | 1,016) | 1,055) | 973) | 960) | |
| Operating assets | 68,432) | 66,699) | 66,077) | 64,476) | 62,565) | |
| Operating Liabilities | ||||||
| Total liabilities | 51,231) | 50,825) | 52,344) | 53,286) | 49,364) | |
| Less: Debt due within one year | 1,520) | 1,425) | 1,423) | 1,678) | 2,166) | |
| Less: Debt due after one year | 30,294) | 29,767) | 31,156) | 31,648) | 27,563) | |
| Operating liabilities | 19,417) | 19,633) | 19,765) | 19,960) | 19,635) | |
| Net operating assets1 | 49,015) | 47,066) | 46,312) | 44,516) | 42,930) | |
| Balance-sheet-based aggregate accruals2 | 1,949) | 754) | 1,796) | 1,586) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.06% | 1.61% | 3.95% | 3.63% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | 4.42% | 3.63% | 3.85% | 0.91% | 6.93% | |
| Uber Technologies Inc. | 20.97% | 40.44% | 21.78% | -40.74% | — | |
| United Airlines Holdings Inc. | 4.28% | 0.97% | 15.54% | 3.50% | — | |
| United Parcel Service Inc. | 7.77% | -13.05% | 7.14% | 26.54% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | 7.49% | 3.77% | 8.09% | 2.58% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 5.68% | 4.36% | -0.84% | 0.67% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 68,432 – 19,417 = 49,015
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 49,015 – 47,066 = 1,949
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,949 ÷ [(49,015 + 47,066) ÷ 2] = 4.06%
4 Click competitor name to see calculations.
The level of net operating assets exhibited an increasing trend over the four-year period. Simultaneously, balance-sheet-based aggregate accruals and the corresponding accruals ratio demonstrated fluctuations. An examination of these metrics offers insights into potential financial reporting quality.
- Net Operating Assets
- Net operating assets increased from US$44,516 million in 2022 to US$49,015 million in 2025. This represents a cumulative growth of approximately 10.3% over the period. The growth was relatively consistent year-over-year, with a slight acceleration between 2024 and 2025.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals increased from US$1,586 million in 2022 to US$1,796 million in 2023, representing a rise of approximately 13.2%. However, accruals decreased significantly in 2024 to US$754 million, before increasing again in 2025 to US$1,949 million. This pattern suggests potential volatility in the timing of revenue and expense recognition.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio followed a corresponding pattern to the aggregate accruals. The ratio increased from 3.63% in 2022 to 3.95% in 2023. A substantial decrease was observed in 2024, with the ratio falling to 1.61%. The ratio then rose sharply in 2025 to 4.06%, exceeding the 2023 level. A ratio above 1% may warrant further investigation, and the increase in 2025, coupled with the prior year’s decrease, suggests a potential shift in accounting practices or underlying business operations. The fluctuations in the accruals ratio could indicate changes in the level of discretion used in financial reporting.
The observed increase in both aggregate accruals and the accruals ratio in 2025, following a period of lower accruals in 2024, merits further scrutiny. A detailed review of the underlying components of accruals, such as accounts receivable, inventory, and deferred revenue, would be beneficial to understand the drivers of these changes and assess the quality of earnings.
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Cash-Flow-Statement-Based Accruals Ratio
Union Pacific Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | 7,138) | 6,747) | 6,379) | 6,998) | 6,523) | |
| Less: Cash provided by operating activities | 9,290) | 9,346) | 8,379) | 9,362) | 9,032) | |
| Less: Cash used in investing activities | (3,762) | (3,325) | (3,667) | (3,471) | (2,709) | |
| Cash-flow-statement-based aggregate accruals | 1,610) | 726) | 1,667) | 1,107) | 200) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 3.35% | 1.55% | 3.67% | 2.53% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | 2.72% | 3.01% | 3.32% | 2.12% | 3.01% | |
| Uber Technologies Inc. | 12.72% | 28.63% | 10.31% | -49.13% | — | |
| United Airlines Holdings Inc. | 4.64% | -13.64% | 7.35% | 38.00% | — | |
| United Parcel Service Inc. | 5.59% | -12.08% | 10.26% | 16.44% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | 5.27% | 0.04% | 6.23% | 4.77% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | 2.24% | 5.28% | 1.66% | -2.30% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,610 ÷ [(49,015 + 47,066) ÷ 2] = 3.35%
2 Click competitor name to see calculations.
The information presents a review of net operating assets and related accruals over a four-year period. Aggregate accruals, as derived from the cash flow statement, exhibit fluctuations, impacting the calculated accruals ratio.
- Net Operating Assets
- Net operating assets demonstrate a consistent upward trend throughout the period, increasing from 44,516 US$ millions in 2022 to 49,015 US$ millions in 2025. This indicates a general expansion of the company’s operational footprint.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals increased significantly from 1,107 US$ millions in 2022 to 1,667 US$ millions in 2023. A subsequent decrease to 726 US$ millions occurred in 2024, followed by an increase to 1,610 US$ millions in 2025. This pattern suggests variability in non-cash transactions affecting net income.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend in aggregate accruals. It rose from 2.53% in 2022 to 3.67% in 2023, decreased substantially to 1.55% in 2024, and then increased again to 3.35% in 2025. The ratio’s fluctuation warrants further investigation, as a consistently high or volatile accruals ratio can sometimes signal potential earnings manipulation or aggressive accounting practices. The decrease in 2024 suggests a reduction in the reliance on accruals relative to cash flows, while the 2025 increase returns the ratio to a level comparable to 2023.
The observed changes in accruals and the accruals ratio suggest a dynamic relationship between reported earnings and underlying cash flows. Continued monitoring of these metrics is recommended to assess the sustainability of earnings and the quality of financial reporting.
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