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
Motorola Solutions Inc., 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 | 13,336) | 12,814) | 12,189) | 10,876) | 10,642) | |
| Less: Cash and cash equivalents | 1,705) | 1,325) | 1,874) | 1,254) | 1,001) | |
| Operating assets | 11,631) | 11,489) | 10,315) | 9,622) | 9,641) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,597) | 12,683) | 12,212) | 11,417) | 11,325) | |
| Less: Current portion of long-term debt | 1,313) | 1) | 5) | 12) | 16) | |
| Less: Long-term debt, excluding current portion | 4,705) | 6,013) | 5,688) | 5,163) | 5,113) | |
| Operating liabilities | 6,579) | 6,669) | 6,519) | 6,242) | 6,196) | |
| Net operating assets1 | 5,052) | 4,820) | 3,796) | 3,380) | 3,445) | |
| Balance-sheet-based aggregate accruals2 | 232) | 1,024) | 416) | (65) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 4.70% | 23.77% | 11.59% | -1.90% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | -9.04% | -2.12% | 36.09% | -11.31% | — | |
| Arista Networks Inc. | 17.14% | 106.22% | 24.14% | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | 20.24% | -7.26% | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | -10.71% | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | 8.42% | 20.97% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -6.96% | -13.35% | 22.01% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.98% | 18.09% | 19.16% | 200.00% | — | |
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
= 11,631 – 6,579 = 5,052
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 5,052 – 4,820 = 232
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 232 ÷ [(5,052 + 4,820) ÷ 2] = 4.70%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrate a consistent upward trajectory over the four-year period. Starting at 3,380 million US dollars at the end of 2020, there is a steady increase to 3,796 million in 2021, followed by a more pronounced rise to 4,820 million in 2022 and reaching 5,052 million by the end of 2023. This growth suggests an expanding operational base and potentially increased investment in operating assets.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals display significant variability over the examined years. The value starts at a negative 65 million US dollars in 2020, indicating a net reduction in accruals for that year. In 2021, this figure turns positive and rises sharply to 416 million, then escalates more than twofold to 1,024 million in 2022, before decreasing substantially to 232 million in 2023. This pattern reveals considerable fluctuations in accrual accounting components, which could reflect changes in working capital management or recognition of certain expenses and revenues.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the trend observed in aggregate accruals, shifting from a negative ratio of -1.9% in 2020 to a significant positive ratio of 11.59% in 2021. It peaks at 23.77% in 2022 before declining markedly to 4.7% in 2023. The elevated ratio in 2021 and 2022 indicates a higher proportion of accruals relative to net operating assets, which may suggest changes in earnings quality or the timing of revenue and expense recognition. The decrease in 2023 shows a move towards a lower accruals component relative to net operating assets, possibly indicating stabilization or improved earnings quality.
Cash-Flow-Statement-Based Accruals Ratio
Motorola Solutions Inc., 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 earnings attributable to Motorola Solutions, Inc. | 1,709) | 1,363) | 1,245) | 949) | 868) | |
| Less: Net cash provided by operating activities | 2,044) | 1,823) | 1,837) | 1,613) | 1,823) | |
| Less: Net cash used for investing activities | (414) | (1,387) | (742) | (437) | (934) | |
| Cash-flow-statement-based aggregate accruals | 79) | 927) | 150) | (227) | (21) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.60% | 21.52% | 4.18% | -6.65% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | -14.62% | 0.00% | 4.86% | -20.46% | — | |
| Arista Networks Inc. | 36.37% | 52.90% | 147.50% | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | 1.64% | -32.20% | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | -17.42% | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | 5.08% | 19.76% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -10.03% | -4.10% | -0.72% | -32.83% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.46% | 2.91% | 8.62% | -15.54% | — | |
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 × 79 ÷ [(5,052 + 4,820) ÷ 2] = 1.60%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated a consistent upward trend over the four-year period. Starting at $3,380 million at the end of 2020, the figure increased to $3,796 million in 2021, followed by a further rise to $4,820 million in 2022, and finally reaching $5,052 million by the end of 2023. This steady growth suggests an expansion in the company's operational asset base, indicating potential growth in operational capacity or investment.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited considerable volatility throughout the period. In 2020, the figure was negative at -$227 million, implying a net decrease in accruals contributing positively to cash flows. However, it sharply rose to $150 million in 2021 and surged further to $927 million in 2022, reflecting a significant increase in non-cash earnings components relative to cash flow. By 2023, the value declined markedly to $79 million, indicating a partial reversal or normalization of accruals, though still positive.
- Cash-Flow-Statement-Based Accruals Ratio
- Mirroring the aggregate accruals, the accruals ratio showed pronounced fluctuations, starting at -6.65% in 2020, which reflects a negative accrual impact on earnings relative to cash flow. The ratio turned positive in 2021 at 4.18%, sharply increased to 21.52% in 2022, suggesting a substantial divergence between earnings and cash flows due to accruals in that year. By 2023, this ratio decreased significantly to 1.6%, indicating a moderation in accruals relative to cash flow.