Question: Exhibits 1.26–1.28 of Integrative
Exhibits 1.26–1.28 of Integrative Case 1.1 (Chapter 1) present the financial statements for Walmart for 2012–2015. In addition, the website for this text contains Walmart’s December 31, 2015, Form 10-K. You should read the management discussion and analysis (MD&A), financial statements, and notes to the financial statements, especially Note 2, ‘‘Summary of Significant Accounting Policies.’’ REQUIRED: REVENUE RECOGNITION a. Does Walmart recognize all of its revenue at a point in time? If not, how is it recognized? COST OF SALES AND INVENTORY b. What costing method does Walmart use to determine cost of sales and inventory? c. How does Walmart handle the requirement to report inventory at lower-of-cost or market? d. Does Walmart have a large LIFO reserve? If not, why? e. Walmart receives discounts from suppliers because it purchases large volumes of merchandise. Is this reported as other income or accounted for in another way? WORKING CAPITAL f. Operations create working capital accounts. Which of Walmart’s working capital accounts are the most financially significant? g. Does Walmart’s working capital management yield a positive or negative net investment in working capital? Is this a good situation for Walmart’s profitability? Why? INCOME TAXES h. Note 9 to Walmart’s consolidated financial statements presents a substantial amount of income tax–related information, including an effective income tax rate reconciliation. Which reconciling items appear to be relatively persistent? i. What is the effect of Walmart’s generation of income in foreign jurisdictions on the effective tax rate? Is the effect changing over time? j. Are Walmart’s foreign earnings growing relative to U.S. earnings? k. What is the interpretation of the line item ‘‘Net impact of repatriated international earnings’’? Why is it a positive reconciling item in some years but negative in other years? l. What are the two largest deferred tax assets? Explain how they have arisen and why they are assets. m. What is the ‘‘valuation allowance’’? It has decreased during the two-year period. What is the implication of this decrease for earnings? n. Why does Walmart report a deferred tax liability for property and equipment? Speculate whether Walmart expanded or contracted based on the information in this section of the tax note. PENSIONS o. What kind of pension plans does Walmart have, and how are earnings affected by each? Exhibits 1.26: 
Exhibits 1.28: 
Exhibits 1.27: 
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Exhibit 1.26 Consolidated Statements of Cash Flows for Nike (amounts in millions) (Case 1.2) For the Fiscal Years Ended May 31: 2014 2015 2016 Cash provided by operations: Net income $ 2,693 $ 3,273 $ 3,760 Income charges (credits) not affecting cash: Depreciation 518 606 649 Deferred income taxes (11) (113) (80) Stock-based compensation 177 191 236 Amortization and other 68 43 13 Net foreign currency adjustments 56 424 98 Exhibit 1.26 (Continued) Changes in certain working capital components and other assets and liabilities: Decrease (increase) in accounts receivable (298) (216) 60 (Increase) in inventories (Increase) in prepaid expenses and other current assets (Decrease) increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: (505) (210) (621) (144) (590) (161) 525 1,237 $ 3,013 (889) $ 3,096 $ 4,680 Purchases of short-term investments (5,386) 3,932 (4,936) 3,655 (5,367) 2,924 Maturities of short-term investments Sales of short-term investments 1,126 2,216 2,386 Investments in reverse repurchase agreements Additions to property, plant, and equipment Disposals of property, plant, and equipment (150) 150 (880) (963) (1,143) 3 3 10 Decrease (increase) in other assets, net of other liabilities Cash used by investing activities (2) 6 $(1,207) $ (175) $(1,034) Cash used by financing activities: Net proceeds from long-term debt issuance Long-term debt payments, including current portion (Decrease) increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock 981 (60) (7) (106) 75 (63) (67) (17) (19) (7) issuances 383 514 507 Excess tax benefits from share-based payment 132 218 281 arrangements Repurchases of common stock Dividends-common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net (decrease) increase in cash and equivalents (2,628) (2,534) (3,238) (799) (899) (1,022) S(2,671) (105) $(2,914) (9) $(1,117) $ 3,337 $ 2,220 S(2,790) (83) Cash and equivalents, beginning of year Cash and equivalents, end of year $ 1,632 $ 2,220 $ 3,852 $ (714) $ 3,852 $ 3,138 Exhibit 1.28 Common-Size and Percentage Change Income Statements for Nike (Case 1.2) Common-Size: Percentage Change: For the Fiscal Year Ended May 31: 2014 2015 2016 2015 2016 Revenues 100.0% 100.0% 100.0% 10.1% 5.8% Cost of sales (55.2%) (54.0%) (53.8%) 46.2% 7.7% 5.3% Gross profit Demand creation expense 44.8% 46.0% 13.0% 6.4% (10.9%) (10.5%) (10.1%) 6.0% 2.0% Operating overhead expense Operating Income Interest (expense) income, net Other income (expense), net (20.6%) (21.8%) (22.2%) 16.5% 7.7% 13.2% 13.6% 13.9% 13.5% 7.8% (0.1%) (0.1%) (0.1%) (15.2%) (32.1%) (0.4%) 0.2% 0.4% (156.3%) 141.4% Income before income taxes 12.7% 13.7% 14.3% 18.7% 9.9% Income tax expense (3.1%) (3.0%) (2.7%) 9.5% (7.4%) NET INCOME 9.7% 10.7% 11.6% 21.5% 14.9% Exhibit 1.27 Excerpts from Notes to Consolidated Financial Statements for Nike (amounts in millions) (Case 1.2) Excerpts from the Summary of Significant Accounting Policies - Revenue Recognition: Nike recognizes wholesale revenues when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. - Allowance for Uncollectible Accounts Reccivable: Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an alowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. The allowance for uncollectible accounts receivable was $43 million and $78 million at May 31, 2016 and 2015, respectively. - Demand Creation Expense Demand creation expense consists of advertising and promotion costs, induding costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. 1 Inventory Valuation: Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. - Property, Plant and Equipment and Depreciation: Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. - Identifiable Intangible assets and Goodwill: This account represents the excess of the purchase price of acquired businesses over the market values of identifiable net assets, net of amortization to date on assets with limited lives. - Income Taxes: The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Income tax expense inclades the following: (amounts in millions) 2014 2015 2016 Currently Payable Deferred $862 (11) $851 $1,045 $943 (113) (80) Income Tax Expense $ 932 $863 1 Stock Repurchases: Nike repurchases outstanding shares of its common stock each year and retires them. Any difference between the price paid and the book value of the shares appears as an adjustment of retained a Laaling carnings whold dr in part. WCN 2-290-20
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