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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- Statement of Comprehensive Income
- Balance Sheet: Liabilities and Stockholders’ Equity
- Cash Flow Statement
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Reportable Segments
- Enterprise Value to FCFF (EV/FCFF)
- Return on Equity (ROE) since 2005
- Current Ratio since 2005
- Price to Operating Profit (P/OP) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Time Warner Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Debt due within one year | ||||||
| Less: Long-term debt, excluding due within 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 | ||||||
| Alphabet Inc. | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Take-Two Interactive Software Inc. | ||||||
| Walt Disney Co. | ||||||
Based on: 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2017 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2017 – Net operating assets2016
= – =
3 2017 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 reveals trends in the net operating assets and accrual measures over four consecutive years.
- Net Operating Assets
- There is a consistent upward trend in net operating assets, increasing from 44,352 million US dollars in 2014 to 49,534 million US dollars in 2017. This steady growth suggests an expansion or strengthening of the asset base used for operations over the period analyzed.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals show a significant change from negative to positive values during the same timeframe. In 2014, the value was -3,855 million US dollars, indicating potential deferrals or reductions in accrued liabilities or expenses. Subsequently, the accruals turn positive, rising substantially to 2,368 million US dollars by 2017. This shift and growth in positive accruals might reflect changes in earnings management, accounting policies, or operational activities affecting timing differences between cash flows and earnings recognition.
- Balance-sheet-based Accruals Ratio
- The accruals ratio follows a similar pattern as the aggregate accruals, moving from -8.33% in 2014 to positive values in the following years, reaching 4.9% by 2017. The increasing ratio indicates that accruals represent a growing proportion of net operating assets. This could imply heightened reliance on non-cash earnings components or adjustments affecting financial reporting quality.
Overall, the data suggests continuous growth in net operating assets alongside a marked transition from negative to positive accruals and increasing accrual ratios. These patterns could be indicative of evolving operational dynamics or accounting practices impacting the accrual components of the financial statements.
Cash-Flow-Statement-Based Accruals Ratio
Time Warner Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Time Warner Inc. shareholders | ||||||
| Less: Cash provided by operations | ||||||
| Less: Cash (used) 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 | ||||||
| Alphabet Inc. | ||||||
| Comcast Corp. | ||||||
| Meta Platforms Inc. | ||||||
| Netflix Inc. | ||||||
| Take-Two Interactive Software Inc. | ||||||
| Walt Disney Co. | ||||||
Based on: 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 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 annual financial reporting quality measures reveals several notable trends over the four-year period ending December 31, 2017.
- Net Operating Assets
- There was a steady increase in net operating assets from 44,352 million US dollars in 2014 to 49,534 million US dollars in 2017. This represents a cumulative growth of approximately 11.7% over the period, indicating an expansion in the company's operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited significant variability. In 2014, accruals were negative at -1,237 million USD, suggesting cash flows exceeded earnings on an accrual basis or potential reversals. However, accruals turned positive in 2015 at 975 million USD, followed by positive but smaller fluctuations in the subsequent years: 603 million USD in 2016 and 1,149 million USD in 2017. The oscillation from negative to positive accruals and fluctuating amounts could imply changes in earnings quality or timing differences between earnings and cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio moved from a negative value of -2.67% in 2014 to positive percentages in the following years: 2.18% in 2015, 1.3% in 2016, and 2.38% in 2017. The negative ratio in 2014 corresponds to the negative aggregate accruals, indicating cash flow strength relative to earnings that year. The subsequent positive ratios signify that accruals contributed increasingly to earnings rather than cash flows, with some fluctuations in magnitude. The rising ratio in 2017, to 2.38%, suggests a higher proportion of accrual-based earnings relative to cash flows, potentially raising concerns about earnings quality if the trend continues upward.
Overall, the data reflects growth in operating assets alongside fluctuating accruals that shifted from negative to positive territory and a generally increasing accrual ratio after 2014. These patterns warrant ongoing monitoring to assess their implications on earnings persistence and financial reporting quality.