Accrual against cash

A company reports two numbers for the same twelve months and they disagree. Profit says one thing and cash from operations says another, sometimes by billions, and both are correct.

This course is about why. Not about whether one is more honest than the other, because neither is, but about the specific mechanism that produces the gap and how to read it.

The shape of the course

Lessons one and two set up the problem: the same year measured two ways, and the rule that decides when a cost belongs to a period.

Lessons three to six are the four cases, and between them they account for every accrual there is. Revenue recognised before the cash arrives. Cash arriving before the revenue is earned. A cost charged before it is paid. Cash paid before the cost is used. Each has its own balance sheet account, and naming the account is how you identify which case you are looking at.

Lesson seven measures the total across ten filed years of one company, using figures read from its own 10-K filings. Lesson eight is the one that matters most: the specific estimates inside an accrual that management chose, and where each of them is disclosed.

What this course does not claim

A large accrual is not evidence of anything on its own. A growing company has large positive accruals for an ordinary reason, a company with heavy equipment has large negative ones for another, and a year with a tax law change can have a gap of billions that nobody chose.

The forensic use of accruals is a different subject and it already has a lesson of its own in the accounting quality course. This one teaches the mechanism, so that a reader meeting the forensic version can tell an interesting number from an expected one.

What you need before starting

The bookkeeping course. Every idea here is an entry, and the four cases are four pairs of accounts. A reader who has not posted an adjusting entry will follow the words and not the mechanism.