Acc 205 Financial Analysis Report

ACC205­Week 5 Final Paper (Wal­Mart Financial Analysis Report) 1

Rosie Collins
ACC 205: Principle of Accounting I
Traci West
March 31, 2014

ACC205­Week 5 Final Paper (Wal­Mart Financial Analysis Report) 2

Financial accounting reports, to include balance sheets and income statements provide accountants and the general public a snap shot of a company’s overall financial condition and possibly their future financial position. This financial information is very important to business owners, executive managers, private investors and employees. The information contained in a company’s financial report has several important uses. Managers and senior leaders of a business
can take extrapolated financial data from the income statement which details monthly earnings as well as the company’s liabilities and equity position. This information can then be used to analyze and forecast future annual budgets. Additionally information obtained in these multiple types of reports can also be used to proactively predict trends that may have a negative financial impact on company’s future operations. On another note a company’s financial reports are used by lending institutions to determine their ability to receive and repay loans used to finance business operations.
I looked at many different companies to research when I reviewed the final week five paper requirements. I decided to research and profile Wal­Mart, Inc., as I spend much of my monthly food allowance at Wal­Mart personally, and would like to see and understand just how financially stable this company appears on paper. As I analyze Wal­Mart’s financial data I will illustrate and explain the importance of the horizontal analysis using specific gauges taken from
Wal­Mart’s previous past two years of annual financial records. I will focus on Wal­Mart’s last

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two years, Current Ratio, Quick Ratio, Cash to Current Liabilities Ratio, and lastly I will detail
Wal­Mart’s net liquidity potential. For my final analysis I will communicate my thoughts and investment suggestions for potential future investors interested in buying stocks in Wal­Mart.

Wal­Mart, Inc. Business Report
Sam Walton opened the Wal­Mart Inc., chain of stores in 1969. There are a total of ten thousand one hundred fifty stores across the entire world. Wal­Mart retails a large assortment of basic merchandise to consumers such as, food, electronics, house ware, health and beauty, jewelry automotive, hardware and miscellaneous other general products.(Wal­Mart,
2012) Based on my research Wal­Mart’s business functions are organized into three operating categories, United States Wal­Mart, the International Wal­Mart and the Sam’s Club stores.
Wal­Mart operates several different types of store formats, i.e. discount stores, supercenters, markets, express stores, and a large e­commerce online business web store online.
(Wal­Mart, 2012). Wal­Mart has retail stores in all fifty states to include Puerto Rico.
Additionally Wal­Mart has retail stores in fourteen other countries. Here is a list of the countries entirely owned by subsidiaries of Wal­Mart. Japan, Argentina, Brazil, Canada and the United
Kingdom. Wal­Mart also has joint partnerships in China and India. Wal­Mart has majority owned retails subsidiaries in five Central American countries. Wal­Mart also provides bill payment, money orders, and check cashing financial services which also generate additional

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revenue. Wal­Mart has its own licensed brands and markets these brands thru private label store brands. (Wal­Mart, 2012)
One leading retail store that competes with Wal­Mart is Target Corporation. Target offers retail products at a higher price hoping to draw the wealthier consumer to purchase at their stores. According to my online research “Why Wal­Mart Beats Its Competitors”, Wal­Mart is facing growing opposition from individuals who simply do not want the store in their communities. Small business mom and pop boutiques would like to see the Wal­Mart retailer be removed from the small cities and towns citing that these stores are “destroying” the look of
“Main Street” (Alpha 2012)
Horizontal Analysis of Income Statement and Balance Sheet
The definition of a Horizontal analysis is the historical comparison of a company’s financial statements. Financial analysts use this data to forecast operational trends or abnormalities. Typical accounting periods captured for this type of report are month to month and year to year. When a financial analyst reviews these types of reports managers can get a broad view look at the company’s operating expense from one year to the next. This type of report can be very useful in the management of a company. Balance sheets can best be reviewed by extracting historical data via a Horizontal analysis. Assets, liabilities and owners equity can all be analyzed and compared to determine if any negative or positive trends are apparent.
Wal­Mart prides itself on being the cheapest everyday price and to help guarantee their success offer price matching tactics, which to date have worked very well for Wal­Mart. Let’s begin by analyzing Wal­Mart’s income statement for the past three years which reflects a positive growth pattern for every entry of the Income Statement. The Income tax­Current

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Domestic entry is the only entry on this income statement that reflects a non growth number. The main reason the Income Tax numbers show a downward trend is likely that the Wal­Mart staff accountants have found many tax loop holes to reduce the actual company income tax burden owed. Let’s take a look at the financial data. Wal­Mart’s revenue increased over these three years by $39,736 M which is a gross increase of 9.1%. Additionally the Cost of Sales climbed from $304,657 M to $335,127 M which emulates a steady trend of 9.1%. I found these numbers interesting as I would have expected to see a much higher cost of sales due to the increased costs of goods during these last three years of economic hardships seen in the United States.
Wal­Mart’s operating income increased from $23,950 M in 2010 to $26,558 in 2012 which depicts a 9% growth. Wal­Mart retail stores net income increased from 2010 to 2011 very slightly and then declined from 2011­2012 with a calculated net increase of $1539 M or 9.1 %.
Now let’s take a look at the Consolidated Balance Sheet for 2012 Wal­Mart had $40.71 B in inventory and assets with an average 1% increase over a three year period. The total inventory made up 74% of Wal­Mart’s current assets. This included 21% of the retail chains total assets.
My translation of these financial numbers is that people in the United States are making purchases on credit versus cash at the registers. Let me also note that Wal­Mart’s Accounts
Receivables reflect $323 M in Bad Debt/Doubtful Accounts as a result of people using credit versus cash. These accounts will more than likely be written off and put against the taxable income earned annually. Another figure on the Consolidated Balance Sheet is the $160B in
Property, Plant & Equipment which portrays an increase over the last three years due to the

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development and opening of new retail chains.
The Common Stock Par value dropped from
$378M in 2010 to $342M in 2012.
As you can see collecting and preparing a horizontal analysis of Wal­Mart’s financial statement has helped in determining the ultimate financial direction of this large company. Let’s move on to another very helpful tool for financial analyst called the Ratio Analysis.
Ratio Analysis
Accountants and financial analyst use the ratio analysis to determine a company’s current business performance compared to past years of business performance. This analysis can be isolated to past quarter performance as well. Many times analyst or accountants can use this data to identify possible operational issues. Ratios are very good tools to compare other similar types of companies. Another ratio that is helpful to determine a company’s liquidity is the Current
Ratio. According to the President of Wal­Mart “the company has performed better than its competitors in the areas of job creation increased Return­on­Investment (ROI), better customer service, competitive pricing and much more. (Wal­Mart, 2012) In order for me to quantify
this statement from the CEO of Wal­Mart I am going to extract the following data and financial calculations using the Current Ratio, Quick Ratio, and Cash to Current Liabilities Ratio over the previous two year. The Current Ratio translates working capital by dividing Wal­marts current assets by current liabilities.
Illustration A
2011
Current Assets
Current Liabilities
Current Ratio

2012
51.89B
58.48B
.89

Current Assets
Current Liabilities
Current Ratio

54.98B
62.3B
.88

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Wal­Mart’s Current Ratio was less than one, which is an indicator that if needed
Wal­Mart would be able to cover its total liabilities based on these strong liquidity numbers. The low ratio number indicates investors will have to use other financial indicators prior to making company investment decisions. Being liquid is a positive aspect when looking to invest in a company stock purchase. Now we go to the Quick Ratio results for Wal­Mart. The Quick Ratio results of a company dictate how much pure cash can be raised on very short notice. This eliminates inventory as a calculation and uses available funds on hand as a primary means for reliable numbers. A 1 to 1 Quick Ratio number is considered acceptable but a little lower than financial institutions typically demand for the purposes of obtaining business loans.
2011
Current Assets Less
Inventory and
Pre­paid Expenses
Current Liabilities
Quick Ratio

2012
15.57

58.48B
.21

Current Assets Less
Inventory and
Pre­paid Expenses
Current Liabilities
Quick Ratio

14.27B

62.3B
.20

The Quick Ratio numbers listed above for Wal­Mart indicate a low ratio which indicates a large quantity of inventory investment. Retail businesses must purchase inventory so that customers may have product to purchase. Little to no inventory drives customers to other business competition. The last and final financial method used to access a company’s liquidity is called the Cash to Current Liabilities Ratio. The formula is simple. C to CLR=Current Cash and
Marketable Securities divided by Current Liabilities.

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2011
Current Cash and
Marketable Securities
Current Liabilities
Quick Ratio

2012
7.4B
58.48B
.12

Current Cash and
Marketable Securities
Current Liabilities
Quick Ratio

6.55B
62.3B
.11

The Cash to Current Liabilities Ratio is very low and again is primarily due to the extremely large capital investment required to purchase inventory for all of their retail locations.
When a business can maintain and gain cash reserves above its current obligations and liabilities then investors will be confident in purchasing stocks in Wal­Mart or similarly performing companies. The financial analysis of Wal­Marts cash flow is low and appears to be tied to its inventory. The Current Assets to Liabilities looks good. Looking at these ratio calculations leads me to believe Wal­Mart may have serious cash flow challenges if their current inventory on hand does not sell quick enough. The current inventory turnover ratio for Wal­Mart is 8.5 which is basically represents how often Wal­Mart’s inventory is sold and then replaced. My initial thoughts on Wal­Mart’s current ratio are the United States past five years of joblessness and high levels of housing foreclosures. This impact on personal income is shown in these ratios.
In closing Wal­Mart is absolutely one of the largest and most predominately successful retail grocery chains in the World. The brand name of Wal­mart is also the most marketed and recognized retailer in the United States. Currently Wal­Mart stock shares sell around $70 which is an increase of $15 over the past thirty six months. This increase reflects a solid Return on
Equity ratio of 20% for the year 2012. Wal­Mart has mastered the art of purchasing inventory from Asia where products are cheap, which enables Wal­Mart to have a very low Cost of Goods

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Sold vehicle. This low Cost of Goods also allows Wal­Mart to remain priced competitive which also drives steady consumer business into all of their retail chain stores. Wal­Mart regardless of the past few years of economic down turns has been in business for over fifty years. If Wal­Mart continues to operate under its current business model its stock shares will be a safe and secure investment. If the economy grows in the near future this stock may yield very large investment profits. ACC205­Week 5 Final Paper (Wal­Mart Financial Analysis Report)

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References

st
Walther. (2012).
Principles of Accounting I (1 ed.). San Diego, CA: Bridgepoint Education.

Retrieved from: https://content.ashford.edu/books/AUACC205.12.1/sections/ Anonymous, (2012) Wal­Mart Web Site, Retrieved from: http://corporate.walmart.com/
Anonymous, (2012) Forbes Web Site, Target and Costco Financial Statements, Retrieved from: http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp Anonymous, (2012) Seeking Alpha,
Why Wal­Mart Beats Its Competitors
, Retrieved from: http://seekingalpha.com/article/562821­why­wal­mart­beats­its­competitors Perr, J. (2012) Daily Kos, Wal­Mart Owners Look to Slash Federal tax Payments, Retrieved from: http://www.dailykos.com/story/2012/11/21/1163884/­Wal­Mart­owners­look­to­slash­fed eral­tax­payments# ACC205­Week 5 Final Paper (Wal­Mart Financial Analysis Report)
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