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
EMC Corp., 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 | 46,612) | 45,885) | 45,849) | 38,069) | 34,268) | |
| Less: Cash and cash equivalents | 6,549) | 6,343) | 7,891) | 4,754) | 4,531) | |
| Less: Short-term investments | 2,726) | 1,978) | 2,773) | 1,413) | 1,787) | |
| Operating assets | 37,337) | 37,564) | 35,185) | 31,902) | 27,950) | |
| Operating Liabilities | ||||||
| Total liabilities | 23,893) | 22,360) | 22,063) | 14,545) | 14,341) | |
| Less: Notes converted and payable | —) | —) | 1,665) | —) | 1,700) | |
| Less: Short-term debt | 1,299) | —) | —) | —) | —) | |
| Less: Current portion of convertible debt | —) | —) | —) | 1,652) | 1,605) | |
| Less: Long-term debt | 5,475) | 5,495) | 5,494) | —) | —) | |
| Operating liabilities | 17,119) | 16,865) | 14,904) | 12,892) | 11,036) | |
| Net operating assets1 | 20,218) | 20,699) | 20,281) | 19,009) | 16,914) | |
| Balance-sheet-based aggregate accruals2 | (481) | 418) | 1,272) | 2,095) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -2.35% | 2.04% | 6.47% | 11.66% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | — | — | — | — | — | |
| Analog Devices Inc. | — | — | — | — | — | |
| Applied Materials Inc. | — | — | — | — | — | |
| Broadcom Inc. | — | — | — | — | — | |
| First Solar Inc. | — | — | — | — | — | |
| Intel Corp. | — | — | — | — | — | |
| KLA Corp. | — | — | — | — | — | |
| Lam Research Corp. | — | — | — | — | — | |
| Micron Technology Inc. | — | — | — | — | — | |
| NVIDIA Corp. | — | — | — | — | — | |
| Qualcomm Inc. | — | — | — | — | — | |
| Texas Instruments Inc. | — | — | — | — | — | |
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
= 37,337 – 17,119 = 20,218
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 20,218 – 20,699 = -481
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -481 ÷ [(20,218 + 20,699) ÷ 2] = -2.35%
4 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Balance-sheet-based accruals ratio | Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. | Using the balance-sheet-based accruals ratio, EMC Corp. deteriorated earnings quality from 2014 to 2015. |
Cash-Flow-Statement-Based Accruals Ratio
EMC Corp., 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 EMC Corporation | 1,990) | 2,714) | 2,889) | 2,733) | 2,461) | |
| Less: Net cash provided by operating activities | 5,386) | 6,523) | 6,923) | 6,262) | 5,669) | |
| Less: Net cash used in investing activities | (2,754) | (2,551) | (5,760) | (3,905) | (3,544) | |
| Cash-flow-statement-based aggregate accruals | (642) | (1,258) | 1,726) | 375) | 336) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -3.14% | -6.14% | 8.79% | 2.09% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | — | — | — | — | — | |
| Analog Devices Inc. | — | — | — | — | — | |
| Applied Materials Inc. | — | — | — | — | — | |
| Broadcom Inc. | — | — | — | — | — | |
| First Solar Inc. | — | — | — | — | — | |
| Intel Corp. | — | — | — | — | — | |
| KLA Corp. | — | — | — | — | — | |
| Lam Research Corp. | — | — | — | — | — | |
| Micron Technology Inc. | — | — | — | — | — | |
| NVIDIA Corp. | — | — | — | — | — | |
| Qualcomm Inc. | — | — | — | — | — | |
| Texas Instruments Inc. | — | — | — | — | — | |
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 × -642 ÷ [(20,218 + 20,699) ÷ 2] = -3.14%
2 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Cash-flow-statement-based accruals ratio | Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. | Using the cash-flow-statement-based accruals ratio, EMC Corp. improved earnings quality from 2014 to 2015. |