CHAPTER 5 Revenue Recognition and Profitability Analysis 273 Profitability Analysis — An Illustration To illustrate the application of the DuPont framework and the computation of the activity and profitability ratios, we analyze the 2013 financial statements of two well-known retailers, Costco Wholesale Corporation and Walmart Stores, Inc. 33 The operations of these two companies are similar in their focus on operating large general merchandising and food discount stores. Illustration 5–26A presents selected financial statement information for the two companies (all numbers are in millions of dollars). 33 Walmart’s financial statements are for the fiscal year ended January 31, 2014. Walmart refers to this as its 2014 fiscal year. Costco’s financial statements are for the fiscal year ended September 1, 2013. For consistency with Costco, we refer to Walmart’s fiscal year as 2013. Illustration 5–26A Selected Financial Information for Costco Wholesale Corporation and Wal-Mart Stores, Inc. Real World Financials Costco Walmart 2013 2012 2013 2012 Accounts receivable (net) $ 1,201 $ 1,026 $ 6,677 $ 6,768 Inventories $ 7,894 $ 7,096 $ 44,858 $ 43,803 Total assets $30,283 $27,140 $204,751 $203,105 Total liabilities $19,271 $14,622 $123,412 $121,367 Total shareholders’ equity $11,012 $12,518 $ 81,339 $ 81,738 Average for 2013: Accounts receivable (net) $ 1,114 $ 6,723 Inventories $ 7,495 $ 44,331 Total assets $ 28,712 $203,928 Total shareholders’ equity $ 11,765 $ 81,539 Income Statement—2013 Net sales $102,870 $473,076 Cost of goods sold $ 91,948 $358,069 Net Income $ 2,061 $ 16,551 On the surface, it appears that Walmart is far more profitable than Costco. As shown in Illustration 5–26A , Walmart’s 2013 net income was $16.551 billion, compared to Costco’s $2.061 billion. But that’s not the whole story. Even though both are very large companies, Walmart is more than six times the size of Costco in terms of total assets, so how can they be compared? Focusing on financial ratios helps adjust for size differences, and the DuPont framework helps identify the determinants of profitability from the perspective of shareholders. Illustration 5–26B includes the DuPont analysis for Walmart and Costco, as well as some additional activity ratios we’ve discussed. Walmart’s return on assets (ROA) is higher than Costco’s (8.12% for Walmart compared to 7.18% for Costco). Why? Remember that both profitability and activity combine to determine return on assets. Costco’s asset turnover is much higher than Walmart’s (3.58 compared to 2.32), but its profit margin is much lower than Walmart’s (2.00% compared to 3.50%). So, even though Costco makes significantly more sales with each dollar of its assets, Walmart makes more profit on each dollar of sales, and Walmart ends up coming out ahead on return on assets. The average days in inventory provides insight into Costco’s higher asset turnover. Inventory takes only 30 days on average before being sold by Costco, compared with 79 for the industry average and 45 days for Walmart. Costco also turns over its accounts receivable faster than Walmart does, but accounts receivable are relatively small so attention would be focused on other ratios for both companies.
Spiceland_Inter_Accounting8e_Ch05
To see the actual publication please follow the link above