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
Alphabet Inc., 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 | 595,281) | 450,256) | 402,392) | 365,264) | 359,268) | |
| Less: Cash, cash equivalents, and marketable securities | 126,843) | 95,657) | 110,916) | 113,762) | 139,649) | |
| Operating assets | 468,438) | 354,599) | 291,476) | 251,502) | 219,619) | |
| Operating Liabilities | ||||||
| Total liabilities | 180,016) | 125,172) | 119,013) | 109,120) | 107,633) | |
| Less: Current finance lease liabilities | 441) | 235) | —) | —) | —) | |
| Less: Short-term debt | 1,996) | 3,299) | 1,363) | 298) | 113) | |
| Less: Long-term debt, excluding current portion | 46,547) | 10,883) | 13,253) | 14,701) | 14,817) | |
| Less: Long-term finance lease liabilities | 2,059) | 1,442) | —) | —) | —) | |
| Operating liabilities | 128,973) | 109,313) | 104,397) | 94,121) | 92,703) | |
| Net operating assets1 | 339,465) | 245,286) | 187,079) | 157,381) | 126,916) | |
| Balance-sheet-based aggregate accruals2 | 94,179) | 58,207) | 29,698) | 30,465) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 32.21% | 26.92% | 17.24% | 21.43% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Comcast Corp. | 4.82% | 2.10% | 1.29% | -6.76% | — | |
| Meta Platforms Inc. | 37.11% | 22.82% | 11.12% | 20.95% | — | |
| Netflix Inc. | 4.06% | 9.36% | -3.78% | 14.21% | — | |
| Trade Desk Inc. | 13.91% | 26.91% | 15.86% | 16.20% | — | |
| Walt Disney Co. | 3.76% | 0.01% | 0.08% | 3.09% | 1.73% | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 20.86% | 13.42% | 6.82% | 7.78% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 12.92% | 6.15% | 4.26% | -3.76% | — | |
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
= 468,438 – 128,973 = 339,465
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 339,465 – 245,286 = 94,179
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 94,179 ÷ [(339,465 + 245,286) ÷ 2] = 32.21%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits an increasing trend over the observed period. Net operating assets demonstrate consistent growth, while balance-sheet-based aggregate accruals also increase, though with some fluctuation in the rate of increase. A closer examination of the accruals ratio reveals potential shifts in earnings quality that warrant further investigation.
- Net Operating Assets
- Net operating assets increased from US$157,381 million in 2022 to US$339,465 million in 2025. This represents a substantial and consistent growth trajectory, indicating expansion of the company’s operational footprint.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals rose from US$30,465 million in 2022 to US$94,179 million in 2025. While generally increasing, the growth was more pronounced between 2023 and 2024 (US$29,698 million to US$58,207 million) compared to the increase between 2024 and 2025 (US$58,207 million to US$94,179 million). This suggests a possible acceleration in accruals relative to the growth in net operating assets during the 2023-2024 period.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio began at 21.43% in 2022, decreased to 17.24% in 2023, and then increased significantly to 26.92% in 2024 and further to 32.21% in 2025. The initial decrease in 2023 may indicate improved earnings quality, however, the subsequent and sustained increases raise concerns. A rising accruals ratio can suggest that a larger proportion of reported earnings are derived from accounting accruals rather than from core operating cash flows. This trend should be investigated to determine if it is sustainable or indicative of potential earnings manipulation.
The increasing accruals ratio, coupled with the growth in aggregate accruals, suggests a potential need for deeper scrutiny of the underlying accounting practices. Further analysis should focus on the specific components of accruals driving these trends and their alignment with the company’s operational performance.
AI Ask an analyst for more
Cash-Flow-Statement-Based Accruals Ratio
Alphabet Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | 132,170) | 100,118) | 73,795) | 59,972) | 76,033) | |
| Less: Net cash provided by operating activities | 164,713) | 125,299) | 101,746) | 91,495) | 91,652) | |
| Less: Net cash used in investing activities | (120,291) | (45,536) | (27,063) | (20,298) | (35,523) | |
| Cash-flow-statement-based aggregate accruals | 87,748) | 20,355) | (888) | (11,225) | 19,904) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 30.01% | 9.42% | -0.52% | -7.90% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Comcast Corp. | 1.38% | 2.38% | -3.44% | -3.88% | — | |
| Meta Platforms Inc. | 28.28% | 15.08% | -7.43% | 1.96% | — | |
| Netflix Inc. | -0.67% | 12.03% | -8.44% | 16.73% | — | |
| Trade Desk Inc. | -23.25% | -20.85% | -42.93% | -30.87% | — | |
| Walt Disney Co. | 1.58% | -1.46% | -1.97% | 1.50% | -0.29% | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 16.91% | 6.38% | -3.21% | -1.72% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | 9.45% | 2.36% | -2.49% | -1.32% | — | |
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 × 87,748 ÷ [(339,465 + 245,286) ÷ 2] = 30.01%
2 Click competitor name to see calculations.
The financial reporting quality, as assessed through cash-flow-statement-based accruals, exhibits a notable shift over the observed period. Net operating assets demonstrate consistent growth annually, increasing from US$157,381 million in 2022 to US$339,465 million in 2025. However, the cash-flow-statement-based aggregate accruals and the resulting accruals ratio display a more dynamic pattern.
- Cash-Flow-Statement-Based Aggregate Accruals
- In 2022, aggregate accruals were negative, registering at -US$11,225 million. This figure improved substantially to -US$888 million in 2023, indicating a reduction in the magnitude of non-cash adjustments decreasing net income. A significant reversal occurs in 2024, with accruals turning positive at US$20,355 million, and continuing to rise to US$87,748 million by 2025. This positive trend suggests increasing non-cash income or decreasing non-cash expenses relative to cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend in aggregate accruals. It begins at -7.90% in 2022, reflecting substantial negative accruals relative to net operating assets. The ratio improves to -0.52% in 2023, signaling a diminished reliance on accruals to manage reported earnings. A marked increase is then observed, with the ratio reaching 9.42% in 2024 and escalating to 30.01% in 2025. This substantial rise indicates a growing proportion of reported earnings derived from accruals rather than cash flows. While not inherently negative, a consistently increasing accruals ratio warrants further investigation to understand the underlying drivers and potential implications for earnings quality.
The divergence between the growth in net operating assets and the increasing accruals ratio suggests a potential shift in the company’s earnings generation process. The substantial increase in positive accruals in the later years of the period requires further scrutiny to determine if it is attributable to legitimate business activities or potentially aggressive accounting practices. Continued monitoring of these trends is recommended.
AI Ask an analyst for more