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
Best Buy Co. Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 17,504) | 19,067) | 15,591) | 12,901) | 13,049) | 13,856) | |
| Less: Cash and cash equivalents | 2,936) | 5,494) | 2,229) | 1,980) | 1,101) | 2,240) | |
| Less: Short-term investments | —) | —) | —) | —) | 2,032) | 1,681) | |
| Operating assets | 14,568) | 13,573) | 13,362) | 10,921) | 9,916) | 9,935) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,484) | 14,480) | 12,112) | 9,595) | 9,437) | 9,147) | |
| Less: Short-term debt | —) | 110) | —) | —) | —) | —) | |
| Less: Current portion of long-term debt | 13) | 14) | 14) | 56) | 544) | 44) | |
| Less: Long-term debt, excluding current portion | 1,216) | 1,253) | 1,257) | 1,332) | 811) | 1,321) | |
| Operating liabilities | 13,255) | 13,103) | 10,841) | 8,207) | 8,082) | 7,782) | |
| Net operating assets1 | 1,313) | 470) | 2,521) | 2,714) | 1,834) | 2,153) | |
| Balance-sheet-based aggregate accruals2 | 843) | (2,051) | (193) | 880) | (319) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 94.56% | -137.14% | -7.37% | 38.70% | -16.00% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 32.91% | 49.06% | — | — | — | — | |
| Home Depot Inc. | 9.91% | 21.77% | — | — | — | — | |
| Lowe’s Cos. Inc. | 2.66% | -12.39% | — | — | — | — | |
| TJX Cos. Inc. | 73.65% | -109.84% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 26.47% | 31.88% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.67% | 12.65% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 14,568 – 13,255 = 1,313
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 1,313 – 470 = 843
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 843 ÷ [(1,313 + 470) ÷ 2] = 94.56%
4 Click competitor name to see calculations.
- Net operating assets
- The net operating assets demonstrate notable variability over the analyzed periods. Initially, there is an increase from 1,834 million USD to a peak of 2,714 million USD in 2019, followed by a slight decline to 2,521 million USD in 2020. Subsequently, a sharp decrease occurs in 2021, reaching 470 million USD. In 2022, the figure rises again to 1,313 million USD, indicating some recovery but remaining below earlier levels.
- Balance-sheet-based aggregate accruals
- The balance-sheet-based aggregate accruals show significant fluctuations. Starting with a negative value of -319 million USD in 2018, they shift to a positive 880 million USD in 2019. A negative figure returns in 2020 (-193 million USD), followed by a substantial drop to -2,051 million USD in 2021, indicating a strong increase in negative accruals. In 2022, the value switches back to positive at 843 million USD, again reflecting considerable volatility.
- Balance-sheet-based accruals ratio
- The accruals ratio exhibits pronounced swings and high volatility. It begins at -16% in 2018, surges sharply to 38.7% in 2019, and then declines to -7.37% in 2020. In 2021, the ratio plunges dramatically to -137.14%, signaling an extreme deviation in accruals relative to net operating assets. This is followed by a rebound to a high positive value of 94.56% in 2022. These erratic changes suggest varying quality or recognition of accruals over the periods examined.
Cash-Flow-Statement-Based Accruals Ratio
Best Buy Co. Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 2,454) | 1,798) | 1,541) | 1,464) | 1,000) | 1,228) | |
| Less: Cash provided by operating activities | 3,252) | 4,927) | 2,565) | 2,408) | 2,141) | 2,545) | |
| Less: Cash (used in) provided by investing activities | (1,372) | (788) | (895) | 508) | (1,002) | (887) | |
| Cash-flow-statement-based aggregate accruals | 574) | (2,341) | (129) | (1,452) | (139) | (430) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 64.39% | -156.54% | -4.93% | -63.85% | -6.97% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | -8.54% | 48.44% | — | — | — | — | |
| Home Depot Inc. | 8.24% | 14.26% | — | — | — | — | |
| Lowe’s Cos. Inc. | -0.14% | -17.28% | — | — | — | — | |
| TJX Cos. Inc. | 55.57% | -121.39% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | -4.02% | 29.06% | 27.98% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 1.83% | 11.33% | 6.78% | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 574 ÷ [(1,313 + 470) ÷ 2] = 64.39%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets experienced significant fluctuations over the observed periods. Starting at 1,834 million USD in early 2018, there was a notable increase to 2,714 million USD in early 2019, followed by a slight decline to 2,521 million USD in early 2020. A sharp decrease was observed in early 2021, with net operating assets collapsing to 470 million USD, before partially recovering to 1,313 million USD in early 2022. This pattern suggests considerable volatility in asset management or valuation during the timeframe.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals demonstrated a highly variable trend, beginning with a modest negative value of -139 million USD in early 2018. There was a substantial increase in the magnitude of negative accruals to -1,452 million USD in early 2019. This was followed by a reversion to a lower magnitude negative figure of -129 million USD in early 2020. However, early 2021 marked an extreme negative outlier at -2,341 million USD, signaling unusual accrual activity or adjustments. In early 2022, the figure dramatically reversed to a positive 574 million USD, indicative of a significant shift in accrual accounting relative to cash flows.
- Cash-flow-statement-based Accruals Ratio
- Consistent with aggregate accruals, the accruals ratio exhibited considerable volatility. The ratio was moderately negative at -6.97% in early 2018, then plunged sharply to -63.85% in early 2019. It rebounded towards a less negative -4.93% in early 2020 before declining to an extreme -156.54% in early 2021, which may reflect substantial discrepancies between accrual earnings and operating cash flow. Remarkably, in early 2022, the ratio swung to a positive 64.39%, indicating that accruals exceeded cash flows significantly, potentially reflecting unusual or non-recurring accounting entries during that period.
- Summary Insights
- The data reveals substantial volatility in net operating assets and accrual measures throughout the five-year span. The sharp fluctuations, particularly the extreme negative and subsequent positive accrual values and ratios, suggest periods of aggressive accrual adjustments or significant changes in operating cash flow relative to reported earnings. The pronounced swings in net operating assets correspond with these accrual variations, indicating that asset composition or measurement might have been impacted by the same underlying factors. Overall, the patterns call attention to the varying quality and potential risk in the financial reporting processes over time.