Accrual Ratio Calculator

Our accrual ratio calculator is built to help you calculate the cash flow accrual ratio and the balance sheet accrual ratio of a company. These ratios can help you evaluate a company's financial reporting quality. Please check out our free cash flow calculator to understand more on this topic.

This article will explain what the accrual ratio is and how to calculate the metric using the accrual ratio formula. Furthermore, we will demonstrate some practical calculation examples to help you understand the concept.

The accrual ratio is one of the best metrics in assessing a company's financial reporting. There are two accrual ratios: the balance sheet accrual ratio and the cash flow accrual ratio.

Accruals are the revenues or expenses earned or incurred by the business, but the cash has yet to exchange hands. Hence, businesses can use accruals such as prepaid revenue to manipulate the financial reporting results.

The accrual ratios are metrics designed to analyze the financial reporting quality of a business. The higher the accrual ratios, the lower the financial reporting quality of the company.

Without further ado, let's look at the accrual ratios calculation.

Now, let's look at the accrual ratio calculation. We will take Company Alpha with the information below as an example:

• Beginning operating asset: $3,000,000;
• Ending operating asset: $3,500,000;
• Beginning operating liabilities: $2,000,000;
• Ending operating liabilities: $1,750,000;
• Net income: $1,500,000;
• Operating cash flow: $500,000; and
• Investing cash flow: $100,000.

Let's start by calculating the balance sheet accrual ratio. This calculation requires three steps:

1. Calculate the beginning net operating assets:

   The net operating assets (NOA) are defined as the difference between the operating assets and the operating liabilities. You can calculate beginning net operating assets using the formula below:

   beginning NOA = beginning operating assets - beginning operating liabilities

   For our example, the beginning NOA is:

   $3,000,000 - $2,000,000 = $1,000,000

2. Calculate the ending net operating assets:

   We can calculate ending NOA using the formula below:

   ending NOA = ending operating assets - ending operating liabilities

   For our example, the ending NOA is:

   $3,500,000 - $1,750,000 = $1,750,000

3. Calculate the balance sheet accrual ratio:

   The last step is to use the formula below to calculate the balance sheet accrual ratio:

   balance sheet accrual ratio = (ending NOA - beginning NOA) / ((beginning NOA + ending NOA) / 2)

   The Company Alpha's balance sheet accrual ratio is:

   ($1,750,000 - $1,000,000) / (($1,000,000 + $1,750,000) / 2) = 0.55

Now, let's look at the cash flow accrual ratio calculation. This calculation requires four steps:

1. Calculate the beginning net operating assets

   Using the beginning NOA formula above, the beginning NOA for Company Alpha is:

   $3,000,000 - $2,000,000 = $1,000,000

   You can check out our net operating assets calculator to understand more about this calculation.

2. Calculate the ending net operating assets

   Using the ending NOA formula above, the ending NOA for Company Alpha is:

   $3,500,000 - $1,750,000 = $1,750,000

3. Calculate the difference between the net income and the operating and investing cash flow

   The next step is to calculate the difference between the net income and the operating and investing cash flow (NI difference) using the formula below:

   NI difference = net income - operating cash flow - investing cash flow

   Hence, the NI difference for Company Alpha is:

   $1,500,000 - $500,000 - $100,000 = $900,000

   Please check out our operating cash flow calculator to understand more on this topic.

4. Calculate the cash flow accrual ratio

   Now, let's calculate the cash flow accrual ratio using the formula below:

   cash flow accrual ratio = (net income - operating cash flow - investing cash flow) / (((beginning NOA + ending NOA) / 2))

   Using the formula stated above, Company Alpha's cash flow accrual ratio is:

   ($1,500,000 - $500,000 - $100,000) / (($1,000,000 + $1,750,000) / 2) = 0.65

A company's earnings come from 2 sources: the cash earning and the aggregate accruals. Cash earnings are the earnings that the company earned from transactions in which the cash has exchanged hands. The aggregate accruals are the earnings from transactions in which the money has yet to change hands.

Hence, companies can use aggregate accruals to boost their earnings. For instance, companies can use a manipulative technique called channel stuffing to boost their aggregate accruals. This is done by offering deep discounts or rebates to entice customers to place their orders before the end of a reporting period.

The accrual ratio calculation is used to detect these manipulative activities. The higher the accrual ratio, the greater the likelihood that the company has used such a technique to manipulate its earnings, and hence the lower the earning quality.