Lesson 7 of 8
Measuring the gap
Ten filed years of Verizon. Profit of $185,437 million, operating cash of $346,064 million, and one year in ten where profit was the larger figure.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Total accruals are net income less cash from operations, and the sign tells you which way the estimates leaned.
- Across ten filed years Verizon reported $185,437 million of profit and $346,064 million of operating cash, a gap of $160,627 million.
- Nine of those ten years had cash above profit, and the one exception has a named cause in the filing.
Subtract cash from operations from net income and you have the year's total accruals. It is one subtraction using two figures a company prints itself, and it measures the part of profit that was estimated rather than collected.
Doing it once tells you little. Doing it across ten filed years of one company shows the shape, and the shape is what this lesson is for.
Verizon, ten filed years: profit against operating cash flow
- Net income attributable to Verizon
- Cash from operating activities
Show the numbers
| Net income attributable to Verizon | Cash from operating activities | |
|---|---|---|
| 2016 | $13,127m | $21,689m |
| 2017 | $30,101m | $24,318m |
| 2018 | $15,528m | $34,339m |
| 2019 | $19,265m | $35,746m |
| 2020 | $17,801m | $41,768m |
| 2021 | $22,065m | $39,539m |
| 2022 | $21,256m | $37,141m |
| 2023 | $11,614m | $37,475m |
| 2024 | $17,506m | $36,912m |
| 2025 | $17,174m | $37,137m |
The subtraction, year by year
Why cash sits above profit for this company
The dominant reason is depreciation, and it is not a judgement about earnings quality. Verizon's fiscal 2025 10-K reports depreciation of $15,350 million (Verizon Communications Inc. FY2025 10-K, accession 0000732712-26-000007) for the year against property, plant and equipment of $109,467 million (Verizon Communications Inc. FY2025 10-K, accession 0000732712-26-000007) at 31 December 2025.
That charge is nearly as large as the whole year's profit of $17,174 million, and no money left the business because of it. The money left years earlier when the network was built.
Any company that owns a great deal of long-lived equipment produces this shape permanently. Reading it as conservative accounting is reading a capital structure as a virtue.
The one year that went the other way
In fiscal 2017 profit exceeded operating cash by $5,783 million, and the filing names the reason.
Verizon's FY2017 10-K reports income before income taxes of $20,594 million (Verizon Communications Inc. FY2017 10-K, accession 0000732712-18-000009) and net income of $30,101 million. Net income was larger than pre-tax income, because the tax line was a credit. The same note states an effective income tax rate for 2017 of (48.3) percent (Verizon Communications Inc. FY2017 10-K, accession 0000732712-18-000009), against 35.2 percent in 2016, and attributes the change to a one-time, non-cash income tax benefit from the enactment of the Tax Cuts and Jobs Act on 22 December 2017.
The deferred portion of that benefit shows up in the cash flow statement as $14,463 million of deferred income taxes. A law changed, the balance sheet was remeasured, profit rose by billions, and not one dollar moved.
What the measure can and cannot say
It can say how much of a decade's reported profit was collected. For Verizon, all of it and more.
It cannot say whether the estimates were reasonable. A single large accrual with a named cause in the filing is a different object from a pattern of small positive accruals with no explanation, and the subtraction treats them identically. Separating them is the job of the forensic lesson in the accounting quality course, which scales the same measure by assets and reads it against a cohort.
Check yourself
Total accruals are computed how?
- Cash from operations minus net income
- Net income minus cash from operations
- Net income minus capital expenditure
Show the answer
Answer: B.
The order sets the sign. A negative figure means cash exceeded profit, which is the ordinary shape for a company carrying heavy depreciation.Verizon's cash from operations exceeded its profit in nine of ten years. What is the main reason?
- Unusually conservative revenue recognition
- Depreciation, a large cost that takes no cash, on a network built in earlier years
- Customers paying earlier than they used to
Show the answer
Answer: B.
Depreciation of $15,350 million in fiscal 2025 is nearly the size of the whole year's profit. Any owner of long-lived equipment shows this shape permanently.In fiscal 2017 Verizon's net income exceeded its pre-tax income. How?
- An accounting error later restated
- The tax line was a credit, from a one-time non-cash benefit on enactment of a tax law change
- Foreign earnings were excluded
Show the answer
Answer: B.
The filing reports an effective rate of negative 48.3 percent for 2017 and names the cause. Remeasuring deferred tax balances moved profit by billions with no cash effect.Sources
- Verizon Communications Inc., FY2016 Form 10-K, filed 21 February 2017, accession 0001193125-17-050292; FY2019 Form 10-K, filed 21 February 2020, accession 0000732712-20-000014; FY2022 Form 10-K, filed 10 February 2023, accession 0000732712-23-000012; FY2025 Form 10-K, filed 17 February 2026, accession 0000732712-26-000007. Net income attributable to Verizon and net cash provided by operating activities for fiscal 2016 to 2025, and depreciation and property, plant and equipment for fiscal 2025.
- Verizon Communications Inc., FY2017 Form 10-K, filed 23 February 2018, accession 0000732712-18-000009, Note 11, for income before income taxes of $20,594 million, the effective income tax rate of negative 48.3 percent, and the statement that the change was due to a one-time non-cash benefit from the enactment of the Tax Cuts and Jobs Act on 22 December 2017.
- Sloan, "Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?", The Accounting Review, 1996, for the finding that the accrual component of earnings is less persistent than the cash component. Sloan measured accruals from balance sheet changes rather than from the cash flow statement.
What this leaves out
- Every figure here is history, read from the filings named. Nothing in this lesson is a statement about Verizon today and nothing is a view on any security.
- Net income here is the amount attributable to Verizon. Consolidated net income including noncontrolling interests is a slightly larger figure and would change each year's accrual by a few hundred million dollars.
- The ten years are drawn from four separate 10-K filings, each carrying three years. Figures restated in a later filing would differ from the ones first reported.
- This measure is unscaled. Comparing it across companies of different sizes requires dividing by assets or revenue, which this lesson does not do.