Accrual Ratio Calculator
Assess financial reporting quality and detect potential earnings manipulation
Calculate Accrual Ratio
Balance Sheet Accrual Ratio
Based on changes in net operating assets
Cash Flow Accrual Ratio
Based on net income vs cash flows
Beginning Period
Cash, accounts receivable, inventory, etc.
Accounts payable, accrued expenses, etc.
Ending Period
Cash, accounts receivable, inventory, etc.
Accounts payable, accrued expenses, etc.
Balance Sheet Accrual Ratio Results
Net Operating Assets
Financial Reporting Quality: High Quality
Low accrual ratio indicates high-quality financial reporting
Formula Used
(Ending NOA - Beginning NOA) / Average NOA
($0 - $0) / $0 = 0.0000
Example Calculation
Company Alpha Financial Data
Beginning Operating Assets: $3,000,000
Beginning Operating Liabilities: $2,000,000
Ending Operating Assets: $3,500,000
Ending Operating Liabilities: $1,750,000
Net Income: $1,500,000
Operating Cash Flow: $500,000
Investing Cash Flow: $100,000
Balance Sheet Accrual Ratio
Beginning NOA = $3,000,000 - $2,000,000 = $1,000,000
Ending NOA = $3,500,000 - $1,750,000 = $1,750,000
Average NOA = ($1,000,000 + $1,750,000) / 2 = $1,375,000
Ratio = ($1,750,000 - $1,000,000) / $1,375,000 = 0.5455
Cash Flow Accrual Ratio
NI - OCF - ICF = $1,500,000 - $500,000 - $100,000
= $900,000
Average NOA = $1,375,000
Ratio = $900,000 / $1,375,000 = 0.6545
Quality Interpretation
High Quality (ratio < 0.05)
Low accrual levels indicate reliable financial reporting
Moderate Quality (0.05 ≤ ratio < 0.15)
Acceptable level of accruals with careful monitoring
Low Quality (ratio ≥ 0.15)
High accruals may indicate earnings manipulation
Key Definitions
Operating Assets
Assets generating revenue (cash, receivables, inventory)
Operating Liabilities
Debts from operations (payables, accrued expenses)
Net Operating Assets
Operating assets minus operating liabilities
Accruals
Revenues/expenses without cash exchange
Analysis Tips
Compare ratios across multiple periods for trends
Benchmark against industry peers for context
High ratios warrant deeper investigation
Consider both balance sheet and cash flow ratios
Understanding Accrual Ratios
What are Accrual Ratios?
Accrual ratios are financial metrics designed to assess the quality of a company's financial reporting. They measure the extent to which earnings are supported by cash flows versus accounting accruals. Higher accrual ratios may indicate potential earnings manipulation.
Why are They Important?
- •Detect potential earnings manipulation
- •Assess financial reporting quality
- •Evaluate sustainability of earnings
- •Support investment decisions
Two Types of Accrual Ratios
Balance Sheet Accrual Ratio
Measures changes in net operating assets relative to average net operating assets.
Cash Flow Accrual Ratio
Compares net income to cash flows from operations and investing activities.
Note: Both ratios help identify discrepancies between reported earnings and underlying economic performance.
Applications and Red Flags
📈 Investment Analysis
Screen potential investments for earnings quality and identify companies with sustainable profit streams
🔍 Audit Planning
Focus audit attention on areas with high accrual ratios that may indicate earnings management
⚠️ Risk Assessment
Identify companies with potentially inflated earnings through aggressive accounting practices
Common Red Flags
- • Consistently high accrual ratios (> 0.15)
- • Increasing accrual ratios over time
- • Large differences between net income and cash flows
- • Rapid growth in receivables or inventory
- • Significant one-time charges or gains