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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- Statement of Comprehensive Income
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Debt to Equity since 2005
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Balance-Sheet-Based Accruals Ratio
Alphabet Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash, cash equivalents, and marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of finance lease liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Less: Long-term portion of finance lease liabilities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Take-Two Interactive Software Inc. | ||||||
| Walt Disney Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | ||||||
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
The financial metrics indicate a notable upward trajectory in net operating assets over the observed period. From December 31, 2021, to December 31, 2024, net operating assets increased progressively from 126,916 million US dollars to 245,286 million US dollars, reflecting substantial growth.
Balance-sheet-based aggregate accruals experienced overall growth but with some fluctuation. The values rose from 26,034 million US dollars in 2021 to a peak of 30,465 million in 2022, then slightly decreased to 29,698 million in 2023 before substantially increasing to 58,207 million in 2024. This pattern suggests some variability in accrual activities with a sharp increase in the latest year.
The balance-sheet-based accruals ratio, which indicates the proportion of accruals relative to net operating assets, mirrored these changes with a decrease from 22.86% in 2021 to 17.24% in 2023, followed by a marked increase to 26.92% in 2024. The declining trend until 2023 suggested improving quality or stability in accruals relative to assets before a significant reversal in 2024.
Overall, the data reflect consistent growth in net operating assets alongside fluctuating accrual measures. The marked increase in both aggregate accruals and accruals ratio in 2024 may warrant further examination to understand the underlying drivers of this change and its implications for financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Alphabet Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Take-Two Interactive Software Inc. | ||||||
| Walt Disney Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | ||||||
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 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.
- Net Operating Assets
- The net operating assets displayed an increasing trend over the four-year period, starting from 126,916 million USD at the end of 2021 and reaching 245,286 million USD by the end of 2024. This consistent growth indicates an expansion in the company’s operational base or investment in assets over the reviewed period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited significant volatility. In 2021, the accruals were positive at 19,904 million USD, declining sharply to a negative figure of -11,225 million USD in 2022, which signals a reversal or reduction in accrued amounts. The figure partially recovered in 2023 to -888 million USD but remained negative. By 2024, accruals increased again significantly to 20,355 million USD. These fluctuations suggest variability in the timing or recognition of revenues and expenses relative to cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio followed a similar pattern to aggregate accruals but expressed as a percentage of net operating assets or a similar base. The ratio was positive at 17.48% in 2021, reflecting a relatively high level of accruals in relation to operating assets. It then dropped sharply to -7.9% in 2022, indicating a reversal in the sign of accruals relative to the base. The ratio improved slightly to -0.52% in 2023, nearing zero, suggesting stabilization. In 2024, the ratio returned to a positive figure of 9.42%, pointing to a renewed increase in accruals relative to assets.
- Overall Analysis
- The data reflects a notable increase in net operating assets over the period, suggesting growth or increased investment. However, the accruals measures reveal periods of considerable fluctuation, particularly between 2021 and 2022, with shifts from positive to negative values. This indicates variability in earnings quality as represented by accruals, which can affect the consistency and predictability of reported income. The partial recovery of accruals and the ratio by 2024 suggests a possible return to more typical patterns of earnings recognition, but the volatility observed warrants attention for its potential implications on financial reporting quality and cash flow alignment.