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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Marathon Petroleum Corp. pages available for free this week:
- Analysis of Solvency Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Present Value of Free Cash Flow to Equity (FCFE)
- Current Ratio since 2011
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Marathon Petroleum Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Debt due within one year | ||||||
| Less: Long-term debt due after one year | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 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 data presents several key measures related to the financial reporting quality over a four-year period. The analysis identifies notable trends and shifts in the respective metrics.
- Net Operating Assets
- The net operating assets showed a decline from US$61,389 million at the end of 2020 to US$48,281 million at the end of 2021. This reduction was followed by a modest increase to US$50,017 million in 2022, then a decrease again to US$48,458 million in 2023. Overall, the value of net operating assets declined over the four-year period, suggesting a contraction in operational asset base or changes in asset utilization.
- Balance Sheet-Based Aggregate Accruals
- This item exhibited substantial volatility. In 2020, aggregate accruals were negative at -US$9,029 million, followed by a further decrease to -US$13,108 million in 2021, indicating a growing negative accrual position. In 2022, the figure sharply reversed to a positive US$1,736 million but then returned to a negative value of -US$1,559 million in 2023. The swing from negative to positive and back to negative suggests fluctuations in accrual accounting components which may impact earnings quality or timing of recognition.
- Balance Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, reflects similar instability. It decreased notably from -13.7% in 2020 to -23.9% in 2021, indicating increased negative accruals relative to operating assets. In 2022, the ratio moved sharply into positive territory at 3.53%, then decreased again to -3.17% in 2023. These shifts imply variability in the proportion of accruals to net operating assets, which may influence the predictability and persistence of earnings.
In summary, the financial quality measures reveal significant fluctuations in accruals and operating assets over the analyzed period. The declines in net operating assets and the volatile pattern in aggregate accruals and accruals ratio could indicate changes in asset management strategies or earnings management practices. The frequent reversals in accruals figure highlight a degree of inconsistency, which may affect the reliability of reported earnings and warrant closer monitoring.
Cash-Flow-Statement-Based Accruals Ratio
Marathon Petroleum Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to MPC | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 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.
The analysis of the financial reporting quality measures over the four-year period reveals notable fluctuations and some underlying trends.
- Net Operating Assets
- The net operating assets demonstrate a declining trend overall. Starting at 61,389 million US dollars at the end of 2020, there is a significant drop to 48,281 million in 2021. The figure slightly recovers in 2022 to 50,017 million, yet decreases again to 48,458 million by the end of 2023. This pattern indicates a contraction in the operational asset base after 2020, remaining relatively stable but at a reduced level thereafter.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals show considerable volatility throughout the observed period. In 2020, the accruals were negative at -7,711 million, indicating potential conservative earnings adjustments. This sharply reverses in 2021 to a positive 7,871 million, suggesting a substantial increase in accruals which may imply more aggressive earnings recognition or changes in working capital management. Subsequently, the accruals revert to negative values in the following two years: -2,426 million in 2022 and -1,341 million in 2023, pointing towards a return to greater alignment between reported earnings and cash flows, or reduced earnings manipulation.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the fluctuations observed in the aggregate accruals. Starting at -11.7% in 2020, it moves sharply to 14.35% in 2021, indicating a significant shift towards accrual-based earnings relative to cash flow. In 2022 and 2023, the ratio declines to negative territory (-4.94% and -2.72%, respectively), which may reflect an improved earnings quality or a more conservative recognition approach in these years. The negative ratios in the later years suggest that cash flows may be outpacing accruals, potentially reflecting stronger cash profitability or cautious revenue recognition.
Overall, the data suggests a period of increased accruals in 2021, followed by a reversion towards more conservative reporting or improved earnings quality in subsequent years. The decline in net operating assets reinforces a trend of asset base contraction or divestiture during this period. The alternating signs and magnitudes in the accruals and their ratios highlight underlying variability in financial statement quality and earnings management practices over the reporting horizon.