Financial statements are very important to a company as well as other stakeholders. They serve to inform the public and potential investors as well as potential investors on the performance of the company. This information is very important to them to enable them make investment decisions. The government also needs the financial statement to assess tax liability of the company and formulate policies. The general public and employees also need the financial statements for information sake while most importantly, the management use the reports to make decisions regarding the company. There are five financial statements namely: Income statement, Balance sheet, Statement of retained earnings, statement of cash flows and Notes to the financial statements (Costales and Szurovy, p.8-10). Due to the importance of the financial statements, guidelines and guidelines have been formulated such as the International Accounting Standards (IAS) and the Generally Accepted Accounting Standards (GAAP) to guide accountants in preparing the financial statements. Despite the guidelines, companies differ in the way they prepare and present their financial statements. This paper seeks to show differences and similarities in the financial statements of two companies: Wal-Mart Stores Inc. and Target Corporation. The financial statements to be compared in this paper are balance sheets, income statements and statements of cash flows of the two companies.
BALANCE SHEET
A balance sheet shows the standing of a company in terms of assets ad liabilities at the end of a period (Costales and Szurovy, p. 23) a vertical analysis of the balance sheet is an analysis where each element of the balance sheet is expressed as a percentage of the total. The analysis is shown in the table below:
Table 1: Vertical analysis of balance sheets of Target Corporation and Wal-Mart Stores Inc for the year ended 01/30/2010
ELEMENT
COMPANY
TARGET CORPORATION
WAL-MART STORES INC.
Cash and short term investments
4.9
4.6
Total Receivables, Net
17.7
2.42
Total Inventory
16.12
19.42
Prepaid Expenses
0
1.75
Other Current Assets, Total
2.61
0.08
Total Current Assets
41.37
28.31
Property/Plant/Equipment, Total - Ne
56.77
59.93
Goodwill, Net
0.1
9.45
Intangibles, Net
0.4
0
Other Long Term Assets, Total
0.13
2.31
Total Assets
100
100
Accounts Payable
14.62
17.84
Accrued Expenses
5.45
10.97
Notes Payable/Short Term Debt
0
0.31
Current Port. of LT Debt/Capital Leases
3.81
2.58
Other Current Liabilities, Total
1.55
0.85
Total Current Liabilities
25.44
32.55
Total Long Term Debt
33.98
21.32
Deferred Income Tax
1.88
3.23
Minority Interest
0
1.46
Other Liabilities, Total
4.28
0
Total Liabilities
65.54
58.56
Common Stock
0.14
0.22
Additional Paid-In Capital
6.55
2.23
Retained Earnings (Accumulated Deficit)
29.07
39.04
Other Equity, Total
-1.3
-0.04
Total Equity
34.46
41.44
Total Liabilities & Shareholders’ Equity
100
100
Total Common Shares Outstanding
744.6
3786
From the table above, both companies have the same type of categories of assets and liabilities. However, Target Corporation has intangible assets and other liabilities which are not there in the Wal-Mart Stores Inc. prepaid expenses, short term debt and minority interest are in the balance sheet of Wal-Mart Stores Inc but not there in the balance sheet of Target Corporation. Target Corporation has a higher proportion of current assets (41.37%) than that of Wal-Mart Stores Inc. (28.31%), thus it is more liquid. Target Corporation also has lower short term liabilities than Wal-Mart Stores Inc which means that Target Company has less short term liabilities. The Target Corporation has a higher proportion of liabilities (65.54%) which means that the corporation is mostly financed by short term liabilities.
INCOME STATEMENT
According to Costales and Szurovy, this is the financial statement that shows how the company generated its income. It shows the income against the expenses and shows the net profit, that is, income less expenses (p. 33). The main aim is to show whether the company operated at a profit or at a loss for a given period. There are two types of income statements namely single step and multiple-step income statements. In the single step, all revenues are accumulated together; the expenses are also accumulated and deducted from the revenues to arrive at the net income. In the multiple-step format, the revenues and expenses are broken down into categories such as gross profit, profit from continuing operation, profit from discontinued operations, income before extra-ordinary items and the net income. Both Target Corporation and Wal-Mart Stores Inc use the multiple step formats in preparing their income statements. In the income statements for both companies, adjustments for irregular or extraordinary items are made by deducting or adding the extra-ordinary items from the net income before extra-ordinary items to arrive at the net income. The irregular items can either reduce or increase the net income depending on the nature of the irregular item.
STATEMENT OF CASH FLOWS
This statement serves the purpose of showing the sources and applications of funds for a company (Costales and Szurovy, p. 41-42). It answers puzzles such as unavailability of cash when a company has made profits. The Target Corporation has a cash flow from operating activities of US $ 5,881 Millions against its net income of US $ 2,488 millions. The cash flow from operating activities of Wal-Mart Stores Inc is US $ 26,249 millions against a net income of US $ 14,335 millions. Both companies are managing their cash well because they have positive cash from operating activities which is also higher than the net income for each company. The two companies have financial flexibility due to the positive cash flow from operating activities.
