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Name__Xiaodan Dong________ Acct 7310 Final Exam: Spring 2008 (due Wednesday,

Wal$ art and %arget A&

ay 1! t" at midnig"t#

'uring t"e presentati(ns, eac" gr(up rec(mmended Wal$ art ()er %arget as a pre*erred in)estment (+ased (nly (n t"e gr(up,s speci*ic t(pic#& 'escri+e, -it" examples *r(m eac" gr(up,s presentati(n, e)idence supp(rting Wal$ art c(mpared -it" %arget& .r(up t(pics: /e)enue /ec(gniti(n 0(licy and 1urrent Assets Group 1 summarized ways how Wal-Mart and Target recognized revenues and provided some ratios, such as current ratio and quick ratio for assets comparison Target!s current ratio "1 #$%& was higher than Wal-Mart!s "$ '$$(& in ($$) Target!s quick ratio "$ *'1%& was higher than WalMart "$ 1')+& in ($$) ,oth ratios indicate Target is more liquid than Wal-Mart Wal-Mart!s working capital deficit was due to efficient use of cash in distri-uting earnings to shareholders and funding operations .lso Group 1 compared two companies in /num-er of days in the collection period0 1t turned out Wal-Mart collected accounts receiva-le faster than Target Thus, Wal-Mart is recommended for potential shareholders and Target is recommended for potential de-t holders 2n)ent(ry and 1(st (* .((ds S(ld Group ( introduced the general 23G4 and inventory information ,oth companies use perpetual inventory system and 5163 1nventory turnover, num-er of days in selling period, gross margin percentage, and 23G47net sales were compared Wal-Mart "inventory turnover8* $%& was more efficient to turnover inventory than Target "inventory turnover8# '+&, and had lower gross margin "(+ 9:& than Target "+1 *:& in ($$) ;owever, Wal-Mart had a higher ")# #:& 23G47net sales ratio than Target "#* (:& in ($$) 1t means that Target cost less to -ring in revenue Group 1 concluded that Wal-Mart turned inventory over faster with a lower mark-up and managed inventory more efficiently St(c3"(lders4 E5uity Group + provided shareholders! equity key statistics in market capitalization, outstanding shares, share prices, share ownership, and payouts, etc Wal-Mart had a higher return on equity ratio "1' ):& than Target "1* 9:&, and a higher equity ratio "9$ ):& than Target "+9 9:& in ($$) 1t means Wal-Mart earned more on equity than Target Wal-Mart outperformed Target in size and equity distri-ution, share prices and payouts, ownership, revenue, gross profit growth, retained earnings, and stockholders! equity ratio, while Target had a higher gross profit percentage and operating margin 'e+t Group 9 introduced types of de-t of Wal-Mart and Target and how much long term de-t and interest the two companies will pay and paid in ($$) Wal-Mart!s total de-t7equity ratio "1 9%& was lower than Target "1 '1&, and its long-term de-t7equity ratio "$ %$& was also lower than Target "$ ''& Wal-Mart had a higher "* +*& times interest earned than Target "* 1%& .ccording to Moody!s ratings, Target had a long-term rating of .(, Wal-Mart had a rating of .a( which is -etter than Target!s rating Group 9 concluded that Wal-Mart had -etter financial fle<i-ility and long-term healthier de-t 6(ng$6i)ed Assets
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Group % summarized some significant events that may have influence on long-lived assets and accounting policies used for long-lived assets, such as straight ling depreciation method WalMart!s property, plant, = equipment average age "9 *' years& was greater than Target "9 +* years& in ($$) Wal-Mart had a higher efficiency ratio "9 (+& than Target "( )#& in property, plant = equipment use Wal-Mart had a higher return on total assets "( (9& ration than Target "1 %#& Group % concluded that Wal-Mart is more efficient in operating and more effective in generating earnings 7 W"at issues made t"is c(mparis(n c"allenging *(r y(ur particular gr(up ((r (t"er gr(ups#8 9'escri+e at least t"ree issues, and "(- t"ese issues c(ntri+uted t( t"e c"allenge (* c(mparing Wal$ art -it" %arget and t"e industry&: 1 When we found Target had an increase in return on equity ratio and a significant decrease in equity, we figured out the decrease from the retained earnings, while Wal-Mart had an increase in retained earnings We tried to find out why Target!s retained earnings decreased so much 3ne of the reasons is that some of the earnings went to community -enefits ;owever, we -elieve there were some other reasons which might -e capital restructure or some investors were leaving ( We had difficulty in finding industry average data, such as equity ratios and return on equity ratios, for the comparison -etween the two companies and the industry We used finance yahoo com, -ut its information is limited, so our comparison -etween Wal-Mart, Target, and the industry still had some limitation + When group ( was comparing the two companies and the industry, they encountered the similar challenge as a-ove The information a-out inventory and 23G4 of the industry was too general and vague 2ompetitors have different specializations, such as food or apparel, so different specialization will have very diverse inventory and 23G4 Thus it is difficult to compare the two companies with the industry which has too much diverse information 1& W"at *eatures (* t"e *inancial statements "elped t( ma3e t"e c(mparis(n easier *(r y(ur particular gr(up ((r (t"er gr(ups#8 9'escri+e at least t"ree *eatures, and "(- t"ese *eatures c(ntri+uted t( ma3ing t"e c(mparis(n easier&: 1 The financial statements also include the historical records of the past a couple of years When we are doing evolution self-comparison research on those statements, we don!t have to look for other copies of the past two years 1t also helps us check the company!s development trend in a chronicle manner ( The -alance sheets have totaled sections, assets, lia-ilities, and shareholders! equity This feature helped us calculate some ratios compara-le -etween companies, such as current ratio and de-t ratio + 1ncome statements record where the e<penses went, such as cost of sales, selling e<penses, depreciation, etc This feature can help us >udge which company is more efficient in operating '& 2n ;udging t"e s(undness (* Wal$ art al(ne, determine -"et"er any (* t"e *(ll(-ing (ccur& %"en ans-er t"ese 5uesti(ns& (2 "a)e pr()ided s(me c(mparati)e num+ers *(r all t"ree *inancial statements, and t"e *inancial statements t"emsel)es, at t"e end (* t"is exam, +ut y(u may als( re*er t( t"e presentati(n "and(uts (r Wal$ art,s 2008 annual rep(rt&# 1& F(r eac" (ne t"at (ccurs, g( t( Wal$ art,s annual rep(rt, and *ind (ut "(- Wal$ art explains t"e (ccurrence (l((3 in t"e 6etter t( t"e S"are"(lders, anagement,s 'iscussi(n and Analysis, and t"e <(tes t( t"e Financial Statements#& 2& F(r eac" (ne t"at d(es n(t (ccur, explain -"y it mig"t raise a =red *lag,> t"at -(uld need t( +e *urt"er in)estigated& (.i)e examples (* explanati(ns t"at c(uld cause y(u t( t"in3 less (* Wal$ art,s s(undness&#

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/e)enue and earnings gr(-ing at di**erent rates, (r m()ing in (pp(site directi(ns Wal-Mart!s revenue grew at the rate of * #:, while the net income grew at the rate of 1( *: The net income growth is faster than revenue growth 1t means that Wal-Mart increased its operation efficiency -y reducing the cost of sales, operating, selling general and administrative e<penses, etc 1f revenue increase, -ut earnings decrease, it means the company has operating efficiency pro-lem with a high operating cost which is eating off the revenue 1f revenue decrease, -ut earnings increase, it means the company is not running very well, and pro-a-ly is selling some property <et inc(me and cas" *l(-s *r(m (perating acti)ities m()ing at materially di**erent rates (r in (pp(site directi(ns Wal-Mart!s net income grew at the rate of 1( *:, -ut cash flow from operating activities grew at the rate of (: 1t is a red flag for Wal-Mart indicating that Wal-Mart is not collecting cash fast enough 3fficial management e<planation would -e needed on this cash flow issue Acc(unts recei)a+le and?(r in)ent(ries gr(-ing muc" *aster t"an sales, (r in (pp(site directi(ns Wal-Mart!s accounts receiva-le grew much faster than sales 1t means Wal-Mart had difficulty in collecting its money -ack ;owever inventories grew slower than sales, which means Wal-Mart was more efficient to manage its inventory than -efore Excessi)e use (* =(t"er> *(r material, unexplained items 1t means the company wants to hide something, -ut Wal-Mart!s financial statements have a reasona-le use of /other0 7(rr(-ings gr(-ing *aster t"an assets +eing *inanced@ de+t rising -"en assets are decreasing& Wal-Mart!s lia-ilities grew a little -it faster "' ':& than assets ") ':& in ($$) 1t means Wal-Mart was using -orrowing money to fund some operation This rate is accepta-le, especially if the operation is funded for a long run 1f de-t rises, -ut assets decrease, it means a company is making money and use -orrowing money to fund its operation This is a red flag for a company

Financial statement n(tes (+scure, rat"er t"an enlig"ten This sign would -e a red flag 1t means the company pro-a-ly wants to hide something that cannot -e e<plained to the pu-lic, or the statement notes are disorganized due to the personnel!s irresponsi-ility Wal-Mart has very clear notes in the financial statement notes 6arge *luctuati(ns (r steady decline in cas" *l(-s *r(m (perating acti)ities ()er time Wal-Mart did not have a large fluctuation or steady decline in overall cash flows from operating activities in ($$) ;owever, there are some items changed a little unsteadily, for e<ample, increase in accounts paya-le was much lower than ($$#, and other operating activities e<pense was much lower than ($$# They may indicate previous investment in operating e<pense has a long run effect and reduces later e<pense 1f a company would have large fluctuations or steady decline in cash flows from operating activities over time, we need to look into whether the company -ought property7equipment for a long-term development or sold property7equipment -efore -ankruptcy
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1"ange in t(p c(mpany management Wal-Mart!s top management group is very sta-le and had great e<perience in retailing industry We would e<pect Wal-Mart to develop steadily and healthily 1f there is a change in top management group in a company, we would look into how much successful e<perience the e<ecutives have in the industry to predict a company!s future Aey *inancial rati(s indicating deteri(rating trends .ccording to the presentations in the class, Wal-Mart had healthy or accepta-le ratios in all aspects, such as de-t ratio, current ratio, and return on equity ratio, e<cept that current ratio and quick ratio were lower than Target and turned to -e less liquid than Target, -ut they were still accepta-le, especially Wal-Mart generates enough cash from operating activities every year to cover de-ts as needed 'eclining (perating inc(me -"en de+t is rising Wal-Mart did not have this sign This phenomenon indicates a company is using the de-t to fund operation, and it does not make money 6arge increase in treasury st(c3 Wal-Mart does not have treasury stock issued in ($$) 5arge increase in treasury stock indicates a company wants to have shares availa-le to issue for employee-purchase plans, or to issue in conversion of converti-le preferred stock, or to use for the acquisition of other companies, or to reduce the num-er of shares outstanding, increasing earnings per share and helping to maintain the market price of the stock, or to defend against hostile takeovers /ead t"e 6etter t( t"e S"are"(lders (included +el(-#& W"at is t"e m(st p(siti)e in*(rmati(n t"at y(u learned a+(ut Wal$ art and -"at is Wal$ art,s +iggest c"allenge8 The most positive information is that Wal-Mart had a good increase in earnings per share which was ?+ 1#, and that the company is achieving its mission of saving people money so they can live -etter The challenge is that the company still has to improve operations and merchandising management That!s why Wal-Mart is still working on its management group improvement -y internal promotion and e<ternal recruitment

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A departure *r(m Wal$ art and %arget& Wal-Mart states in its @otes to the 6inancial 4tatements that its inventory valued at 5163 appro<imates the value of the inventory if it were valued at 6163 Therefore, 1 am asking you to leave Wal-Mart and think a-out A<<onMo-ile The following is pu-lic information a-out A<<onMo-ile!s profits during ($$# and ($$) from a we-site that reports on corporations and from the notes to A<<onMo-ile!s ($$) financial statements A<plain the effect of the 5163 method on A<<onMo-ile!s profit ,e sure to e<plain the effect of /inventory accumulations and drawdowns0 "what do you think is happeningB&, as well as the 5163 contrast with 6163

The we-site, .ccountingWA, com, said the following a-out oil prices and profits on .ugust 19, ($$# C Last weeks drop in oil prices resulting from the terrorist plot against airliners bound for the !"! is likel# to pro$e temporar#% as economists predict continued escalation in global demand for fuel! &nd !"! oil giants are e'pected to en(o# health# profits% some of which are protected from ta'ation because the companies record their in$entories based on the Last )n *irst +ut ,L)*+- method% a ta' benefit designed to protect cash flow in industries where prices increase rapidl#! .fforts in /ongress to repeal the pro$ision failed twice last #ear% but discussion of repeal continues in "enate *inance /ommittee hearings on broad ta' reform% and news that .''on recorded the highest L)*+ reser$e in histor#% 015!4 billion% has prompted charges that the compan# seriousl# understated income for the second 1uarter% according to the 2all "treet 3ournal!4 A<<onMo-ile!s 1$-D filing with the 4A2 for the year ($$) reported the following in its @otes to the 6inancial 4tatementsC 3. Miscellaneous Financial Information )n 2556% 2556 and 2555% net income included gains of 0326 million% 0451 million and 0215 million% respecti$el#% attributable to the combined effects of L)*+ in$entor# accumulations and draw7downs! 8he aggregate replacement cost of in$entories was estimated to e'ceed their L)*+ carr#ing $alues b# 025!4 billion and 015!9 billion at :ecember 31% 2556% and 2556% respecti$el#!
A<<onMo-ile used 5163 to record the last units purchased as the first units sold When prices rise over time, 5163 records the sale of the most e<pensive inventory first and can reduce ta<es When prices are increasing, A<<onMo-ile must replace inventory currently -eing sold with higher priced goods, so that 5163 -etter matches current cost against current revenue 5163 also defers paying ta<es on an income arising solely from inflation .s oil prices will keep rising and when there is a temporary drop in price, A<<onMo-ile will accumulate the inventory, in order to take advantage of 5163 inventory system and the rising price trend to ma<imize its profit 1f new replacement inventory is out and the inventory is drawn down, older inventory with lower cost will -e sold at the current price, and this liquidation will lead to the recognition of higher net income and higher ta<es, -ut as there is a ta< -enefit protecting cash flow in this industry, the negative effect of higher ta< charge is ignored 3nly higher net income is recognized 6163 accounting is a good method when there are may different groups of similar
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products 1t sells the oldest item, reflecting the underlying commercial su-stantial transaction 6or -eginning companies, 6163 reports the value of merchandise to -olster their -alance sheet ;owever having the higher valued inventory and the lower cost of goods sold on the company!s financial statements may increase the chances of getting a loan When a company prospers, it may switch to 5163 to reduce the amount of ta<es "referred to Wikipedia com at httpC77en wikipedia org7wiki76163EandE5163Eaccounting&

Thank you very much for your help!!!

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