Wal-Mart Accounting

Abstract

This paper was prepared for Wal-Mart to analyze (1) its stockholder sections of balance sheets and dividend policy for how they inform shareholders of equity positioning; (2) its revenue recognition and income measurement; (3) effect of income taxes and their impact on financial statements for appropriate estimation and planning; (4) various pension plans for their implications on balance sheet and income statement; (5) differentiate between operating and capital leases for addressing their impact on balance sheet and income statement; (6) complex financial statements for informing shareholders in making economic decisions.

Keywords: stockholders’ equity, revenue recognition, taxes, leases, pensions, financial position, financial statements

Accounting Portfolio for Wal-Mart

Stockholders’ Equity

1. Determine how your company got its initial financial start in terms of debt (liabilities) or equity (capital). Support your response.

In 1945, Walton borrowed $20,000 and used $5,000 savings to purchase a variety store in Newport, Arkansas. He paid back the loan with the profit that he made from the business. In 1950, Walton bought a discount store and title to the building with his savings in Bentonville, Arkansas. According to Entrepreneur (2016), “Throughout the 1950s, using borrowed money [debt] and the profits [capital] from stores he [Sam Walton] already owned, Walton acquired one variety store after another. By 1960, he was the proud owner of 15 stores.” In 1962, he opened the first Walmart. Mr. Walton opened 18 Wal-Mart stores by 1969, then he decided to take the company public. It offered 300,000 shares of common stock at $16.50 per share during its initial public offering. “The initial offering generated nearly $5 million…” (Entrepreneur, 2016). Mr. Walton used these monies to pay off the previous debts and expand his business.

1. Analyze the equity section of your company’s balance sheet as compared to your company’s industry average. Rate the company’s performance against its competitors.

Common stock, capital in excess of par value, retained earnings, and accumulated other comprehensive income (loss) are listed on Walmart’s annual consolidated balance sheet in the Equity section. The section presents the balance of each equity account a point in time.

According to MorningStar, Walmart’s main competitors in the United States are Amazon (ecommerce), Costco, and Target (see chart below).

Walmart’s debt-to-equity ratio, compare to Amazon, Costco, and Target, tells us that the company finance less debt through its common shareholders.

The return-on-common-equity measures the ability to generate earnings from the equity. Walmart’s return-on-common-equity ratio is higher than industry average. However, Target is much able to generate earnings from its equity than Walmart.

Earnings Per Share measures net income per share of common stock. Although Walmart’s EPS is higher than industry average, it’s lower than Costco and Target.

Equity ratio measures the amount of assets being financed by equity (owners’ investments). The higher the better because it’s much cheaper than debt finance. Walmart’s equity ratio is higher than industry average and its competitors.

1. Review your company’s dividend policy and its history. Based on the information, discuss the trends over the past year.

Walmart dividend policy is included in its company bylaws under general provisions. It states that the dividends may be declared by the Board and may be paid in cash, property, or shares of stock or evidences of indebtedness of the company.

According to its FY2015 annual report shareholders’ equity disclosure, it has awarded share-based compensation to associates and nonemployee directors. Company’s shareholder-approved stock incentive plan was established to grant stock options, restricted stock, performance share units and other equity compensation awards. The intention is to align the interests of its associates with its shareholders.

According to Walmart (2016), “…has increased its annual cash dividend every year since first declaring a $0.05 per share annual dividend in March 1974.” In fiscal year 2013, Walmart distributed $1.59/share dividend to its shareholders. This number increased to $1.96 in fiscal year 2015. In February 2016, the Board of Director approved an annual cash dividend for fiscal year 2017 of $2.00/share. The trend shows to me that Walmart strives to build strong returns to shareholders although the number is not big. The company has to retain earnings to improve the stores, innovate, and strengthen relationships with its customers.

Income Measurement/Revenue Recognition

1. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) came together on a unified project to outline the accounting principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. Research IAS-18, Revenue, and discuss how it would apply to your company.

IAS-18 addresses the sale of goods, the rendering of services, and the use by others of entity assets yielding interest, royalties and dividends (IFRS, IAS-18, 2012). For Walmart, it mainly looks at the revenue recognition method for sale of goods. Under IAS-18, all the following conditions must be satisfied prior to recognizing the revenue (IFRS, IAS-18,2002):

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;