Walmart Accounting Analysis

Walmart Accounting Analysis

The purpose of this section is to evaluate the degree to which Wall-Mart’s accounting captures its true business practices. Specifically, this section will examine places where Wall-Mart has accounting flexibility. Additionally, this section will evaluate the appropriateness of Wall-Marts accounting policies and estimating techniques.

Together, these provide an indication of the credibility behind Wall-Mart’s numbers. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting ND the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that: (1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts ND expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate cause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Policies Wall-Mart has several policies and estimates used to measure its critical factors and risks. Inventory management is one of the most important key success factors in the retail industry.

Wall-Mart uses the last-in, first-out (“LIFO”) method in valuing inventories at the lower of cost or market. When analyzing Wall-Marts key accounting policies one will find a significant accounting change in the firm’s inventory method during the 201 0 fiscal year. As stated in Wall-Marts annual report, “Effective May 1, 2010, the Company implemented a new financial system for its operations in the United States, Canada and Puerco Rice. ” Under this new System, Wall-Mart decided to change the level at which the retail method of accounting is applied, “The Company changed the level at which it applies the retail method of accounting for inventory in these operations from 13 divisions to 49 departments. As stated in the Management Discussion & Analysis section, Wall-Mart believes, “applying the retail method of accounting for inventory at the departmental bevel better segregate merchandise with similar cost-to-retail ratios and turnover, as well as providing a more accurate cost of goods sold and ending inventory value at the lower of cost or market for each reporting period. ” Recently, there has been some debate as to whether the retail method of accounting or the weighted average cost method is more beneficial for the retail industry. However, since Wall-Mart is a discount retailer, it has proven favorable for the company to use the retail method of accounting. Under this method the inventory is valued at the lower of cost or market since Arkansas are currently taken as a reduction of the retail value of inventory.

Wall-Mart recognizes revenues at the time the sale is made to the customer. Wall-Mart’s method of accounting for revenues differs from its competitor, Target in some instances. For example, Target does not include sales tax in total revenues; whereas Wall-Mart recognizes sales revenue, net of sales taxes, and estimated sales returns at the time it sells merchandise to the customer. However, similarly both companies do not recognize revenue from gift cards until merchandise is purchased and the customer redeems the art. After much analysis of Wall-Mares annual report, it was found that the company uses a financial measure, free cash flow, which is considered a non- GAP financial measure under the SEC’s rules.

Free cash flow measures the ability to generate additional cash from business operations and therefore is believed to be an important financial measure to evaluate the business’ financial performance. As stated in the MD section of Wall-Mart’s annual report, “Free cash flow should be considered in addition to, rather than as a substitute for, income from continuing operations as a measure of our reference and net cash provided by operating activities as a measure Of our liquidity. ” There are several methods in calculating a company’s free cash flow; Wall-Mart views this measure as supplemental information to the firm’s entire statement of cash flows. I feel as though the choice to use the measure of free cash flow may seem deceiving and perhaps mislead readers of Wall- Mart’s annual report.

Wall-Mares free cash flow does not represent the actual cash available because the measure does not deduct the payments for debt and other contractual obligations or payments made for business acquisitions Assess Cocoa noting Flexi ability Accounting Flexibility: high level Summary of Critical Accounting Policies Management strives to report the financial results Of the company in a clear and understandable manner, although in some cases accounting and disclosure rules are complex and require us to use technical terminology. In preparing our Consolidated Financial Statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial session and results of operations as reflected in our financial statements. Overview Wall-Mart Stores, Inc. Is currently rated as having Very Aggressive Accounting & Governance Risk (AGRO).

This places them in the 9th percentile among all companies, indicating higher Accounting & Governance Risk (AGRO) than 91 % of companies. The forensic risk summary table below highlights materials risks, if any, and lists the most critical business issue for each risk. AGRO Impact shows the deductions from a perfect 100 AGRO score due to flagged metrics. RISK I AGRO IMPACT I TOP ISSUE Corporate Governance Events | 46. 5 | Litigation: Other Regulatory I High Risk Events | 33. 7 Share Repurchases I Revenue Recognition 0. 0 | N/A Expense Recognition | 9. 0 | Selling G Expenses/Operating Expense I Asset-Liability Valuation | 10. 8 | Goodwill/Total Assets AGRO scores are based on statistical analysis of accounting and governance risk factors.

Lower scores indicate heightened corporate integrity risk, indicating an increased likelihood of future class action litigation, material financial restatements or impaired equity performance. Evaluate Accounting Strategy 1 . Segment operating income and comparable store sales The company measures the results of its segments using, among other measures, each segment’s operating income, which includes certain corporate overhead allocations. From time to time, we revise the measurement of each segment’s operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by our chief operating decision maker. When we do so, the segment operating income for each segment affected by the revisions is restated for all periods resented to maintain comparability. 2.

Adjustment Of the clarification Of certain revenues and expenses In connection with the company’s finance transformation project, we reviewed and adjusted the classification of certain revenue and expense items within our Consolidated Statements of Income for financial reporting purposes. 3. Return on Investment We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization and rent expense) for the fiscal year divided by average invested capital during that period. We consider average invested capital to be the average of our beginning. ROI is considered a non- GAP financial measure under the SEC’s rules.

We consider return on assets (“ROAR”) to be the financial measure computed in accordance with GAP that is the most directly comparable financial measure to ROI as we calculate that financial measure. ROI differs from ROAR (which is income from continuing operations for the fiscal year divided by average total assets of continuing operations for the period) because ROI: adjusts operating income to exclude retain expense items and adds interest income; adjusts total assets from continuing operations for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital.

Although ROI is a standard financial metric, numerous methods exist for calculating a company s ROI. As a result, the method used by management to calculate ROI may differ from the methods other companies use to calculate their ROI. We urge you to understand the methods used by another company to calculate its ROI before impairing our ROI to that of such other company. 4. Free Cash Flow We define free cash flow as net cash provided by operating activities of continuing operations in a period minus payments for property and equipment made in that period. We generated positive free cash flow of $14. 1 billion, $11. 6 billion and $5. 7 billion for the years ended January 31, 2010, 2009 and 2008, respectively.

The increase in our free cash flow is primarily the result of improved operating results and inventory management. Free cash flow is considered a non-GAP financial measure under the SEC’s rules. Management believes, however, that free cash flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the company’s financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, income from continuing operations as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.

Additionally, our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statement Of cash flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company’s free cash flow. As a result, the method used by our management to calculate free cash flow may differ from the methods other companies use to calculate their free ash flow. We urge you to understand the methods used by another company to calculate its free cash flow before comparing our free cash flow to that of such other company. Inventories Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to each merchandise groupings retail value. The FIFO cost-to-retail ratio is based on the initial margin of beginning inventory plus the fiscal year purchase activity. The cost-to retail ratio for measuring any LIFO reserves is based on the initial margin of the fiscal year purchase activity sees the impact of any markdowns. The retail method requires management to make certain judgments and estimates that may significantly impact the ending inventory valuation at cost as well as the amount of gross profit recognized. Judgments made include recording markdowns used to sell through inventory and shrinkage.

When management determines the salability of inventory has diminished, markdowns for clearance activity and the related cost impact are recorded at the time the price change decision is made. Factors considered in the determination of markdowns include current ND anticipated demand, customer preferences and age of merchandise, as well as seasonal and fashion trends. Changes in weather patterns and customer preferences related to fashion trends could cause material changes in the amount and timing of markdowns from year to year. Income Taxes The determination Of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws.

Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and Circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements.

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