Paper Instructions:

Walmart is a very large chain of retail stores selling consumer goods. As it states in its Form 10-K for fiscal 2015: Wal-Mart Stores, Inc. (‘‘Walmart,’’ the ‘‘Company’’ or ‘‘we’’) helps people around the world save money and live better—anytime and anywhere—in retail stores or through our e-commerce and mobile capabilities. Through innovation, we are striving to create a customer-centric experience that seamlessly integrates digital and physical shopping. Physical retail encompasses our brick and mortar presence in each market where we operate. Digital retail is comprised of our e-commerce websites and mobile commerce applications. Each week, we serve nearly 260 million customers who visit our over 11,500 stores under 63 banners in 28 countries and e-commerce websites in 11 countries.

Our strategy is to lead on price, differentiate on access, be competitive on assortment and deliver a great experience. Leading on price is designed to earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at everyday low prices (‘‘EDLP’’). EDLP is our pricing philosophy under which we price items at a low price every day so our customers trust that our prices will not change under frequent promotional activity. Price leadership is core to who we are. Everyday low cost (‘‘EDLC’’) is our commitment to control expenses so those cost savings can be passed along to our customers. Our digital and physical presence provides customers access to our broad assortment anytime and anywhere. We strive to give our customers and members a great digital and physical shopping experience.

For more detailed discussion of Walmart’s stores, products, customers, and business model, visit the company’s website: www.corporate.walmart.com.

Exhibit 1.19 presents comparative balance sheets, Exhibit 1.20 presents comparative income statements, and Exhibit 1.21 presents comparative statements of cash flows for Walmart for the three fiscal years ending January 31, 2014, 2015, and 2016. Walmart prepares its financial statements in accordance with U.S. GAAP. For more detail on Walmart financial statements, or to download the fiscal 2015 Form 10-K, you can visit Walmart’s investor relations page: www.stock.walmart.com/investors/default.aspx.

REQUIRED

Industry and Strategy Analysis

  1. Apply Porter’s five forces framework to the retail industry.
  2. How would you characterize the strategy of Walmart? How does Walmart create value for its customers? What critical risk and success factors must Walmart manage?

Balance Sheet

  • Describe how ‘‘cash’’ differs from ‘‘cash equivalents.’’
  • What are Walmart’s two largest assets on the balance sheet (in dollar amounts)? How do these assets reflect Walmart’s strategy?
  • Walmart reports accounts receivable net of an allowance for uncollectible accounts. Why? Identify the events or transactions that cause accounts receivable to increase and decrease. Also identify the events or transactions that cause the allowance account to increase and decrease.
  • How does accumulated depreciation on the balance sheet differ from depreciation expense on the income statement?
  • What is Walmart’s largest current liability in dollar amount? What does it represent?
  • What is Walmart’s largest liability in dollar amount? In what types of assets did Walmart likely invest this financing?
  • What does Walmart report in accumulated other comprehensive income (loss)? What does this amount represent? When, if ever, will these gains and losses appear in net income?

Income Statement

  • What type of transaction gives rise to the primary source of Walmart’s revenues? At the end of each fiscal year, what does Walmart have to estimate to measure total (net) revenues for the fiscal year?
  • What types of expenses does Walmart likely include in (1) cost of goods sold and (2) selling, general, and administrative expenses?
  • Walmart reports interest expense that is much larger than interest income. Why?

Statement of Cash Flows

  • Why does net income differ from the amount of cash flow from operating activities?
  • Why does Walmart add the amount of depreciation and amortization expense to net income when computing cash flow from operating activities?
  • Why does Walmart show increases in inventory as subtractions when computing cash flow from operations?
  • Why does Walmart show increases in accounts payable as additions when computing cash flow from operations?
  • What was the single largest use of cash by Walmart during this three-year period? How does that use of cash reflect Walmart’s business strategy?
  • What was Walmart’s single largest use of cash for financing activities during this three-year period? What does that imply about Walmart’s financial position and performance?

Relations between Financial Statements

  • Prepare an analysis that explains the change in retained earnings from $85,777 million at the end of fiscal 2014 to $90,021 million at the end of fiscal 2015. Do not be alarmed if your reconciliation is close to, but does not exactly equal, the $90,021 million ending balance.

Interpreting Financial Statement Relations

Exhibit 1.22 presents common-size and percentage change balance sheets and Exhibit 1.23

presents common-size and percentage change income statements for Walmart for fiscal years ended January 31, 2014, 2015, and 2106. The percentage change statements report the annual percentage change in each account from fiscal 2013 to 2014, and from fiscal 2014 to 2015.

  • The percentage changes in prepaid expenses and other current assets jumped up 16.5% in fiscal 2014 and then fell by 35.2% in fiscal 2015. Did the changes in the dollar amounts of this account have a huge impact on total assets (see Exhibit 1.22)? Explain.
  • During this three-year period, how did the proportion of total liabilities change relative to the proportion of shareholders’ equity? What does this imply about changes in Wal-mart’s leverage?
  • How did net income as a percentage of total revenues change from fiscal 2013 to fiscal 2015? Identify the most important reasons for this change.
  • Does Walmart generate high or low-profit margins? How do Walmart’s profit margins relate to the company’s strategy?

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