Equity, Cash Flow, And Notes Analysis

Equity, Cash Flow, and Notes Analysis

Introduction

The success of a business entity depends on its ability to properly create, understand and analyze the financial statements. Financial statement analysis is important for understanding profitability and a firm's financial condition. These documents help a firm in many ways, such as in making better financial decision and creating a clearer picture to attract creditors and investors. In highlighting the financial numbers for Wal-Mart, Team A will address the ownerÐŽ¦s equity and the cash flow pieces of the business ending fiscal period January 31, 2004. Supportive explanatory notes will help in providing the analysis needed to understand the firm and to state our position in support of the Wal-Mart philosophy that makes it a thriving company.

Statement of OwnerÐŽ¦s Equity

The statement of changes in owner's equity shows the changes that took place in the amount of owner's equity during a period of time. The statement starts with the amount of owner's equity on a given balance sheet date and summarizes the additions and subtractions from that amount during a specific period of time. The statement of ownersÐŽ¦ equity reports both changes in owner investments in the business and changes in retained earnings for the business. Another important function of this statement is to link the income statement to the balance sheet.

The statement of ownersÐŽ¦ equity is usually the shortest and least complicated of the financial statements. The most common change is the retained earnings account. If the business makes a profit, retained earnings increases unless all the profits are paid in dividends or withdrawals by the owners. The two accounts that normally appear on this statement are the common stock and the retained earnings.

Please see the following statement of OwnerÐŽ¦s Equity for Wal-Mart (Table 1). The analysis of Wal-Mart includes:

„X Retained earnings have increased steadily over the past three years from 29,984 to 37,576. This would be an increase of about 27%. Retained earnings are a measure of profitability of the business to date, less all dividends declared on all classes of stock. Success will be reflected in an increased stock price.

„X Dividends paid to shareholders increased from $0.28 to $0.36 for a 27% increase. This is a sign of rational management. The company is returning money to shareholders that they cannot invest at above-average rates of return.

„X Return on shareholders equity was 19.4 % in 2002, 20.9% in 2003 and currently 21.3% for 2004.

„X Wal-Mart also purchased company stock. This affect the companyÐŽ¦s after-tax cost of borrowing, total capitalization targets and expected future cash needs.

„X The number of outstanding shares of stock has decreased as a result of the company buying back stock.

„X Stock options exercised by executives have increased by 50%.

„X Net Income from continuing operations has increased from 6,448 to 8441. This represents an increase of 37%.

„X There was also a pension liability adjustment in 2003.

Statement of Cash Flows

One of the hardest financial statements to read an interpret is the Statement of Cash Flows. This financial statement ÐŽ§explains why cash changed during a fiscal period. Cash flows from operating, investing, and financing activities are shownЎЁ (Marshall, 2003). When analyzing this document, a person can determine where a company is spending most of its money and where the company is receiving its money. This helps investors and creditors determine whether a company is able to fund its operating, investing, and financing operations.

Wal-MartÐŽ¦s financial statements are very strong. As demonstrated in Table 2, there are a few key points from the Statement of Cash Flows that should be noted:

„X Since sales revenue increased over prior year, the decrease in accounts receivable indicates that the company has been successful in collecting debt incurred by customers.

„X The increase in inventory reflects the additional products needed to keep up with customer demand (that is indicated by the rising revenue number on the Income Statement).

„X An increase in accounts payable indicates that we are holding onto money longer (stretching our payables) in addition to buying more product. This corresponds with the increase in inventory.

„X Additional property, plant and/or equipment were purchased