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
Kimberly-Clark Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 17,523) | 15,283) | 14,518) | 15,151) | 14,602) | |
| Less: Cash and cash equivalents | 303) | 442) | 539) | 616) | 923) | |
| Operating assets | 17,220) | 14,841) | 13,979) | 14,535) | 13,679) | |
| Operating Liabilities | ||||||
| Total liabilities | 16,626) | 15,060) | 14,500) | 14,208) | 14,427) | |
| Less: Debt payable within one year | 486) | 1,534) | 1,208) | 953) | 1,133) | |
| Less: Long-term debt, excluding payable within one year | 7,878) | 6,213) | 6,247) | 6,472) | 6,439) | |
| Operating liabilities | 8,262) | 7,313) | 7,045) | 6,783) | 6,855) | |
| Net operating assets1 | 8,958) | 7,528) | 6,934) | 7,752) | 6,824) | |
| Balance-sheet-based aggregate accruals2 | 1,430) | 594) | (818) | 928) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 17.35% | 8.21% | -11.14% | 12.73% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Procter & Gamble Co. | -2.96% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 2020 Calculation
Net operating assets = Operating assets – Operating liabilities
= 17,220 – 8,262 = 8,958
2 2020 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2020 – Net operating assets2019
= 8,958 – 7,528 = 1,430
3 2020 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,430 ÷ [(8,958 + 7,528) ÷ 2] = 17.35%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a fluctuating trend over the analyzed period. Starting at 7,752 million US dollars in 2017, there was a decline to 6,934 million in 2018. This was followed by a recovery to 7,528 million in 2019 and a significant increase to 8,958 million in 2020. This upward movement in the last year suggests an expansion of the operational asset base.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals showed considerable volatility across the four years. In 2017, the value was positive at 928 million US dollars, but it sharply declined to a negative figure of -818 million in 2018. Subsequently, the accruals returned to positive territory with 594 million in 2019 and increased further to 1,430 million in 2020. This sequence indicates fluctuations in the recognition of revenues and expenses deferred to balance sheets that could affect earnings quality.
- Balance-sheet-based Accruals Ratio
- The accruals ratio also reflected notable variability. It started relatively high at 12.73% in 2017, then reversed sign to -11.14% in 2018, suggesting significant changes in accrual accounting practices or timing effects that year. In 2019, the ratio normalized somewhat to 8.21% and then increased further to 17.35% in 2020. The rising positive ratio in the latter years may indicate an increasing proportion of earnings driven by accruals rather than cash flows.
Cash-Flow-Statement-Based Accruals Ratio
Kimberly-Clark Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Kimberly-Clark Corporation | 2,352) | 2,157) | 1,410) | 2,278) | 2,166) | |
| Less: Cash provided by operations | 3,729) | 2,736) | 2,970) | 2,929) | 3,232) | |
| Less: Cash used for investing | (2,305) | (1,042) | (902) | (851) | (732) | |
| Cash-flow-statement-based aggregate accruals | 928) | 463) | (658) | 200) | (334) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 11.26% | 6.40% | -8.96% | 2.74% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Procter & Gamble Co. | -11.18% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | -2.34% | — | — | — | — | |
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 2020 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 928 ÷ [(8,958 + 7,528) ÷ 2] = 11.26%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated a fluctuating trend over the four-year period. Starting at 7,752 million US dollars in 2017, there was a notable decline to 6,934 million in 2018. In 2019, the figure showed a recovery to 7,528 million, followed by a more significant increase in 2020, reaching 8,958 million. Overall, the net operating assets displayed a pattern of initial decrease, subsequent recovery, and eventual growth beyond the starting value.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals based on the cash flow statement experienced considerable volatility. The measure began positively at 200 million US dollars in 2017 but reversed sharply to a negative 658 million in 2018. Following this, the figure swung back to positive territory with 463 million in 2019, and further increased to 928 million in 2020. This indicates substantial fluctuations in accruals activity, with a marked improvement in the last two years.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, revealed similar variability. The ratio was 2.74% in 2017 before dropping substantially to -8.96% in 2018, implying a negative accrual position relative to cash flows that year. In 2019, the ratio rebounded to a positive 6.40%, improving further to 11.26% in 2020. This pattern suggests the accruals ratio moved from a negative state to an increasing positive trend over recent years, indicating enhanced earnings quality or changes in accrual management strategies.