Modelling the accruals process and assessing unexpected accruals*

accounting identity in expression (1) implies that the change in common equity is simply equal
to the change in cash under cash accounting.
Like Richardson et al. (2005), I measure accruals as the difference between comprehensive
income under accrual accounting and comprehensive income under cash accounting as follows:
TACC CNICNI t t t
c
t t t
OIB Ct DA It FE Ft
TWC NCO NFO
t t t
Given the articulation of income statement to balance sheet, equation (2) demonstrates that the
same total accruals can be calculated indirectly from the balance sheet variables or directly from
the cash flow and income variables. This is signified by the last two lines in equation (2) which
stem from the TWC, NCO, and NFO identities in Table 1. 5
First, total working capital accruals can be indirectly calculated as the change in total working
capital assets or indirectly calculated as comprehensive operating income before depreciation
and amortisation expense minus operating cash flow. Second, non-current operating accruals can
be indirectly calculated as the change in non-current net operating assets, or directly calculated
as capital expenditures minus comprehensive depreciation and amortisation expenses. Third,
operating accruals (the sum of the previous two accruals) can be indirectly calculated as the
change in non-cash net operating assets, or directly calculated as comprehensive operating
income minus free cash flow. Finally, financing accruals can be indirectly calculated as the
5 However, data availability could favour one method over another. For instance, it will be easier to calculate
accruals from cash flows for U.S. data as long term receivables and investments in marketable securities are grouped
into one item #32 in Compustat.
(2)
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