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
Williams-Sonoma Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jan 28, 2024 | Jan 29, 2023 | Jan 30, 2022 | Jan 31, 2021 | Feb 2, 2020 | Feb 3, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 5,273,548) | 4,663,016) | 4,625,620) | 4,661,424) | 4,054,042) | 2,812,844) | |
| Less: Cash and cash equivalents | 1,262,007) | 367,344) | 850,338) | 1,200,337) | 432,162) | 338,954) | |
| Operating assets | 4,011,541) | 4,295,672) | 3,775,282) | 3,461,087) | 3,621,880) | 2,473,890) | |
| Operating Liabilities | |||||||
| Total liabilities | 3,145,687) | 2,961,965) | 2,961,413) | 3,010,239) | 2,818,182) | 1,657,130) | |
| Less: Current debt | —) | —) | —) | 299,350) | 299,818) | —) | |
| Less: Long-term debt | —) | —) | —) | —) | —) | 299,620) | |
| Operating liabilities | 3,145,687) | 2,961,965) | 2,961,413) | 2,710,889) | 2,518,364) | 1,357,510) | |
| Net operating assets1 | 865,854) | 1,333,707) | 813,869) | 750,198) | 1,103,516) | 1,116,380) | |
| Balance-sheet-based aggregate accruals2 | (467,853) | 519,838) | 63,671) | (353,318) | (12,864) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -42.54% | 48.41% | 8.14% | -38.12% | -1.16% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 26.40% | 18.01% | 32.91% | 49.06% | — | — | |
| Home Depot Inc. | -1.45% | 15.25% | 9.91% | 21.77% | — | — | |
| Lowe’s Cos. Inc. | 8.87% | -2.92% | 2.66% | -12.39% | — | — | |
| TJX Cos. Inc. | 7.22% | 30.23% | 73.65% | -109.84% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 20.94% | 16.15% | 26.47% | 31.88% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.16% | 12.17% | 12.67% | 12.65% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31), 10-K (reporting date: 2020-02-02), 10-K (reporting date: 2019-02-03).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,011,541 – 3,145,687 = 865,854
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 865,854 – 1,333,707 = -467,853
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -467,853 ÷ [(865,854 + 1,333,707) ÷ 2] = -42.54%
4 Click competitor name to see calculations.
The analysis of the financial reporting quality measures reveals notable fluctuations in the company's net operating assets and accruals over the five-year period.
- Net Operating Assets
- The net operating assets demonstrate a variable trend. Beginning at approximately US$1.10 billion in early 2020, there is a significant decline to about US$750 million in early 2021. This is followed by a moderate recovery to roughly US$814 million in early 2022 and a substantial increase to over US$1.33 billion in early 2023. However, the figure declines again to approximately US$866 million by early 2024. Overall, these data points indicate high volatility with a peak in early 2023.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibit considerable oscillation throughout the timeline. Starting with a negative value of nearly -US$13 million in 2020, the figure plummets sharply to -US$353 million in 2021. It then swings to a positive US$64 million in 2022 and further rises to a peak of around US$520 million in 2023, before again turning negative to -US$468 million in 2024. Such pronounced swings suggest significant variability in non-cash components of earnings.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrors the large swings seen in aggregate accruals but expressed as a percentage of net operating assets. The ratio begins marginally negative at -1.16% in 2020, sharply decreases to -38.12% in 2021, turns positive to 8.14% in 2022, rises steeply to 48.41% in 2023, and then falls again to -42.54% in 2024. These substantial percentage variations indicate inconsistent accrual behavior relative to the asset base, which could imply changes in earnings management practices or operational volatility.
In summary, the data portray a company experiencing significant fluctuations in net operating assets and accruals, with considerable volatility in accruals ratios. Such patterns warrant further investigation into the underlying causes, including potential changes in accounting policies, operational challenges, or market conditions affecting financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Williams-Sonoma Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 28, 2024 | Jan 29, 2023 | Jan 30, 2022 | Jan 31, 2021 | Feb 2, 2020 | Feb 3, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 949,762) | 1,127,904) | 1,126,337) | 680,714) | 356,062) | 333,684) | |
| Less: Net cash provided by operating activities | 1,680,273) | 1,052,822) | 1,371,147) | 1,274,848) | 607,294) | 585,986) | |
| Less: Net cash used in investing activities | (188,257) | (353,955) | (226,247) | (168,884) | (185,548) | (187,899) | |
| Cash-flow-statement-based aggregate accruals | (542,254) | 429,037) | (18,563) | (425,250) | (65,684) | (64,403) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -49.31% | 39.96% | -2.37% | -45.88% | -5.92% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | 16.87% | -2.63% | -8.54% | 48.44% | — | — | |
| Home Depot Inc. | -3.12% | 14.43% | 8.24% | 14.26% | — | — | |
| Lowe’s Cos. Inc. | 7.91% | -4.62% | -0.14% | -17.28% | — | — | |
| TJX Cos. Inc. | 3.04% | 23.97% | 55.57% | -121.39% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 13.19% | 0.41% | -4.02% | 29.06% | 27.98% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 9.69% | 4.57% | 1.83% | 11.33% | 6.78% | — | |
Based on: 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31), 10-K (reporting date: 2020-02-02), 10-K (reporting date: 2019-02-03).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -542,254 ÷ [(865,854 + 1,333,707) ÷ 2] = -49.31%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show considerable variability over the analyzed periods. Starting at approximately 1.1 billion USD, there is a marked decline to around 750 million USD in the following year. Subsequently, the figures indicate a recovery to approximately 814 million USD, followed by a significant increase to over 1.33 billion USD. In the most recent period, net operating assets decrease again to around 866 million USD. This pattern reflects notable fluctuations in asset investment or asset composition over time.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals derived from the cash flow statement exhibit substantial fluctuations throughout the periods. Initially, there is a negative accrual of approximately -65.7 million USD, indicating conservative accrual management. The subsequent year shows a sharp increase in negative accruals to -425.3 million USD, signifying a significant deviation. The accruals then revert closer to zero, with -18.6 million USD, before swinging to a positive accrual of 429.0 million USD in the fourth period. The latest period reports a reversal back to a negative accrual of -542.3 million USD. These sharp swings suggest volatility in non-cash adjustments affecting earnings quality.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrors the volatility seen in aggregate accruals. It starts at a modest -5.92%, deepens markedly to -45.88%, and then reduces substantially to -2.37%. This is followed by a large positive spike to 39.96% before reversing to an even larger negative ratio of -49.31%. The magnitude and direction of these changes indicate significant variability in the relationship between accruals and operating assets, which may imply inconsistent underlying earnings quality or changes in accounting estimates and policies over the years.