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
Time Warner Cable Inc., 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 | 49,277) | 48,501) | 48,273) | 49,809) | 48,276) | |
| Less: Cash and equivalents | 1,170) | 707) | 525) | 3,304) | 5,177) | |
| Less: Short-term investments in U.S. Treasury securities | —) | —) | —) | 150) | —) | |
| Operating assets | 48,107) | 47,794) | 47,748) | 46,355) | 43,099) | |
| Operating Liabilities | ||||||
| Total liabilities | 40,278) | 40,484) | 41,326) | 42,526) | 40,739) | |
| Less: Current maturities of long-term debt | 5) | 1,017) | 1,767) | 1,518) | 2,122) | |
| Less: Long-term debt, excluding current maturities | 22,497) | 22,701) | 23,285) | 25,171) | 24,320) | |
| Operating liabilities | 17,776) | 16,766) | 16,274) | 15,837) | 14,297) | |
| Net operating assets1 | 30,331) | 31,028) | 31,474) | 30,518) | 28,802) | |
| Balance-sheet-based aggregate accruals2 | (697) | (446) | 956) | 1,716) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -2.27% | -1.43% | 3.08% | 5.79% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Take-Two Interactive Software Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
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
= 48,107 – 17,776 = 30,331
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= 30,331 – 31,028 = -697
3 2015 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -697 ÷ [(30,331 + 31,028) ÷ 2] = -2.27%
4 Click competitor name to see calculations.
- Net Operating Assets
-
The net operating assets exhibited minor fluctuations over the four-year period. Starting at US$30,518 million at the end of 2012, the figure increased slightly to US$31,474 million in 2013. However, it subsequently declined to US$31,028 million in 2014 and further decreased to US$30,331 million by the end of 2015. Overall, the trend indicates relative stability with a modest downward movement in the latter years.
- Balance-Sheet-Based Aggregate Accruals
-
There is a noticeable shift in the aggregate accruals from positive to negative values over the observed period. In 2012, accruals were relatively high at US$1,716 million, decreasing significantly to US$956 million in 2013. This downward trend continued with values turning negative in 2014 and 2015, reaching -US$446 million and -US$697 million respectively. The transition to negative accruals suggests changes in the timing of recognition of operating items or shifts in working capital management.
- Balance-Sheet-Based Accruals Ratio
-
The accruals ratio mirrored the pattern seen in aggregate accruals, declining consistently throughout the period. It started at 5.79% in 2012, fell to 3.08% in 2013, and recorded negative values of -1.43% in 2014 and -2.27% in 2015. This decreasing ratio reflects a reduction in the proportion of accruals relative to net operating assets, reinforcing the observation of a shift from asset-inclusive accruals to a conservative or potentially reversing accrual stance in the later years.
Cash-Flow-Statement-Based Accruals Ratio
Time Warner Cable Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income attributable to TWC shareholders | 1,844) | 2,031) | 1,954) | 2,155) | 1,665) | |
| Less: Cash provided by operating activities | 6,539) | 6,350) | 5,753) | 5,525) | 5,688) | |
| Less: Cash used by investing activities | (4,345) | (4,092) | (3,476) | (3,345) | (3,530) | |
| Cash-flow-statement-based aggregate accruals | (350) | (227) | (323) | (25) | (493) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.14% | -0.73% | -1.04% | -0.08% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | — | — | — | — | — | |
| Comcast Corp. | — | — | — | — | — | |
| Meta Platforms Inc. | — | — | — | — | — | |
| Netflix Inc. | — | — | — | — | — | |
| Take-Two Interactive Software Inc. | — | — | — | — | — | |
| Walt Disney Co. | — | — | — | — | — | |
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 × -350 ÷ [(30,331 + 31,028) ÷ 2] = -1.14%
2 Click competitor name to see calculations.
The financial data presents several key indicators over a four-year period ending in 2015. The trends provide insights into the company's operational asset base and accrual accounting practices as measured by cash-flow-statement-based metrics.
- Net Operating Assets
- The net operating assets show a slight fluctuation over the period. Beginning at 30,518 million US dollars in 2012, there was a moderate increase to 31,474 million in 2013, followed by a decline in the subsequent years to 31,028 million in 2014 and further down to 30,331 million in 2015. Overall, the net operating assets remained relatively stable with a minor downward trend after 2013, indicating a relatively consistent asset base used in operations.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals are negative throughout the period, indicating that cash flows exceed accrued earnings each year. The value starts at -25 million US dollars in 2012, significantly decreases to -323 million in 2013, then slightly recovers to -227 million in 2014, before declining again to -350 million in 2015. This suggests increased reliance on cash flows relative to accruals, with notable variability reflecting changes in working capital or other accrual components.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio, expressed as a percentage of net operating assets, follows a similar pattern to aggregate accruals. It begins at a negligible -0.08% in 2012, drops sharply to -1.04% in 2013, rebounds slightly to -0.73% in 2014, and falls again to -1.14% in 2015. The negative values indicate persistent negative accruals relative to net operating assets, suggesting that reported earnings may be conservative compared to cash flow, and the volatility in this ratio points to fluctuations in the quality and consistency of earnings recognition over time.