lecture notes - 1-9

7/27/2019 Lecture Notes - 1-9

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ACCOUNTING 301

LECTURE NOTES

Autumn 2013

Paul Febry, CPA

(Some of the materials contained inthese notes have been reprinted fromProfessor Dawn Matsumotos lecture

notes with her kind permission)


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THE ROLE OF ACCOUNTING IN BUSINESS

What is accounting?

Who are the primary users of financial accounting?

Others?

Why do they need this information?

Example: Should I buy this stock?

Theoretical value of the firm:

What are the benefits to entities to supply this information?

What are the costs?


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STANDARD SETTING

Why do we need standards?

Who sets the standards in the U.S.?

SEC (Securities and Exchange Commission)

FASB (Financial Accounting Standards Board)

Before FASB:Committee On Accounting Procedures (CAP)

Accounting Research Bulletins (ARBs)

Accounting Principles Board (APB) APB Opinions (APBOs)

Currently:Accounting Standards Codification (ASC)

What about SOX?


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How are standards set?

Advantages: Disadvantages:

How do we know standards are followed?

International Financial Reporting Standards (IFRS)Reason for global accounting standards:

Difficulties/Drawbacks:

Current Status:


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CONCEPTUAL FRAMEWORK

Purpose: To set forth fundamentals on which financial reportingstandards are based

SFAC #8, Ch. 1 Object ive o f General Purpos e Financial Report in g

Provide financial information about the reporting entity that isuseful to existing and potential equity investors, lenders, and other

creditors in making decisions in their capacity as capital providers.

SFAC #8, Ch. 3 Quali tat ive Character ist ics of Useful Financ ial

Informat ion

Fundamental Qualitative Characteristics:

Relevance: capable of making a difference in a decision made by

users

Faithful Representation: depicts the economic phenomena itpurports to represent

The FASB and the IASB are currently working on a joint project to revisethe conceptual framework where it is incomplete and inconsistent.SFAC No. 8 Chapters 1 and 3 have been completed to date.


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Enhancing Qualitative Characteristics: Comparability (and consistency)

Verifiability

Timeliness

Understandability

Constraints:

Cost Effectiveness

Materiality

What about Conservatism?


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SFAC #6 Elements of Financ ial Statements

Assets probable future economic benefit obtained orcontrolled by a particular entity as a result of pasttransactions

Liabilities probable future sacrifices of economic benefitresulting from a present obligation of a particular entity as aresult of past transactions

Equity residual ownership interest (assets less liabilities)

o Transactions with owners

o Comprehensive Income

Comp Inc. = NI + Other Comp. Income

Revenue Expenses + Gains - Losses

o Revenues: Gains:

o Expenses: Losses:


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SFAC #5 Recogn it ion and Measurement in Financial Statements

Recognition: The process of recording an item in the financialstatements

What is the alternative to recognition?

Criteria for recognition:

Definitions the item meets the definition of an element offinancial statements

Measurability the item has an attribute you can measure

Five different attributes currently used in practice:

1. Historical cost

2. Current cost

3. Market Value

4. Net Realizable Value

5. Present value of future cash flows

Relevance the attribute is relevant

Reliability the attribute is reliably measured

Which measurement is the most common for recognition? Why?


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Recent Trends: Fair Value Accounting

An irrevocable option to value some or all financial instruments atfair value

What is fair value?

Measuring fair value: FASBs Hierarchy (ASC 820-10-35):

Level 1: Most desirable: quoted market prices in active markets for

identicalassets or liabilitiesLevel 2: Inputs other than quoted prices that are observable for theasset or liability. Comparison to similarassets or liabilities in active orinactive markets; inputs derived from observable related market dataLevel 3: Least desirable:Unobservableinputs that reflect entitys ownassumptions; based on best information available in the circumstances

What are the benefits of fair value accounting?

What are the shortcomings?

Movement to balance-sheet approach


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THE ACCOUNTING PROCESS

Illustration 2-4 (p. 56 in the Text) provides an overview of theaccounting cycle. We will not focus on all the steps in the process

the main steps are:Journalization

Posting

Adjustments

Statement Preparation

Closing

JournalizationIn order to maintain the equality of the equation, accountants havedeveloped a simple method of representing transactions the

journal entry

There are three components to a journal entry:1)

2)3)

The direction of the effect on an account is represented bydebits and credits.

What does debit and credit mean?

DEBIT CREDITASSETS = LIABILITIES + S/E

To increase the assets (left-hand side) we need to debitthese accounts.To increase the liabilities and S/E (right-hand side) we need to creditthese accounts.


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Likewise, to decrease assets we creditthese accounts and to decreaseliabilities and S/E we debitthese accounts.

So, as long as debits = credits, the accounting equation will remain inbalance. So, for all journal entries debits must equal credits!

What about revenues and expenses?

AdjustmentsSome events that need to be recorded are not the result oftransactions with external parties. These events require adjusting

entries at the end of the reporting.

Prepayments (deferrals):

Accruals:

Estimated items:

Periodic inventory:


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Practice Problem (continued):Analyze the following items and determine if an adjusting entry isnecessary.

1) At month end, a physical count determined the cost of beer, wine,and spirits remaining on hand to be $2,000. Paul also counted hisother supplies (limes, napkins, coasters, etc.) and found that hehad about $200 worth of supplies remaining.

2) Interest on the bank loan is payable annually on Dec. 31.

3) The bar furniture and beer tabs are expected to last 5 years(assume that the salvage value is zero).

4) The company sold certain beers at a discount to its Mug Clubmembers throughout the month.

5) The company has been leasing the building for a month sincestarting operations.


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Financial Statements and Closing Entries

The financial statements can now be prepared from the endingbalances in each T-account. Recall however that revenues andexpenses DO NOT appear on the balance sheet but do affectthebalance sheet through their effect on retained earnings. In order toprepare the balance sheet, we need to t ransferthe revenues andexpenses to the retained earnings account. This method oftransferr ing th e revenues and expens es to retained earnin gs is

known as the c los ing process.

Closing process:1. Close revenues and expenses to income summary account

2. Close income summary account to retained earnings3. Close dividends to retained earnings

What does it mean to close an account?

How is this accomplished?

Practice Problem (continued)Prepare the closing entries for Duchess for the month of September.

Prepare the income statement, balance sheet, and statement ofshareholders equityfor Duchess.


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DuchessIncome Statement

For the month ended September 30, 2013

DuchessStatement ofShareholders Equity



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DuchessBalance Sheet

September 30, 2013


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To prepare the cash flow statement, we must return to the Cash T-account andexamine the transactions that affected the account throughout the period. First,classify each transaction as operating, investing, or financing, and then preparethe statement of cash flows (using the direct method).

DuchessStatement of Cash Flows


Notice that Cash from Operations DOES NOT equal Net Income.


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ACCRUAL VS. CASH FLOWS CONCEPTSCash flows from operations is a distinctly different concept fromnet income (accrual accounting):

1. Cash Flow Accounting benefits and efforts are measured interms of cash inflows and cash outflows

2. Accrual Accounting benefits and efforts are measured interms of revenues and expenses. Revenues are inflows ofassets (or decreases in liabilities) and Expenses are outflowsof assets (or creation of liabilities). Cash is just one type ofasset!

Very generally:a) Revenues are recognized when earned

b) Expenses are recognized when the effort (or resources) isexpended to generate revenue (matching principle)

Examples of differences in timing:

ExamplesRevenueearned beforecash received When earned: When cash recd:

Cash receivedbefore revenueearned When cash recd: When earned:


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ExamplesExpenseoccurs(resourcesexpended)before cashpaid

When expense occurs: When cash paid:

Cash paidbefore expenseoccurs(resourcesexpended)

When cash paid: When expense occurs:

Note that in each case, an asset or liability holds the timingdifference between net income and cash flows from operations.

Which measure is more important?

Why do users of financial statements care about Statement ofCash Flows?


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Recall that in our Duchess example, Net Income for Septemberdid not equal Cash Flows from Operations. Why?

Lets reconcile Net Income to Cash Flows from operating activitiesusing the indirect method:

Sep. 2013Operations:Net income

Adjustments to reconcile net incometo net cash from operations:

Changes in operating assets andliabilities:

Net Cash from Operations


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In the News: Operating Cash Flows vs. Net Income

Microsofts $6.2 billion goodwill impairment (YE 6/30/12)

Q4 Net Income: ($0.5 billion)Q4 Net Operating Cash Flow: $7.7 billion

Microsofts earning release: Microsoft Corp. today announced that it will take a non-cash, non-tax-deductible income statement charge for the fourth quarter of fiscal year2012 for the impairment of goodwill in its Online Services Division segment, mostlyrelated to its 2007 aQuantive, Inc., acquisition.

Under accounting guidelines, companies are required to conduct an annual goodwillimpairment test for each business unit. Goodwill arises in an acquisition when the fair

value paid for a business exceeds the value of the identifiable net assets. The goodwill inthe Online Services Division was substantially the result of the 2007 acquisition ofaQuantive. As a result of its 2012 impairment review, Microsoft has determined that awrite down of its Online Services Division goodwill of approximately $6.2 billion isrequired.Microsoft completed its acquisition of aQuantive on Aug. 13, 2007, in an all-cashtransaction valued at just over $6.3 billion. While the aQuantive acquisition continues toprovide tools for Microsofts online advertising efforts, the acquisition did not accelerategrowth to the degree anticipated, contributing to the write down.

Microsoft does not expect this accounting write down to affect its ongoing business orfinancial performance.

What was the journal entry to record the purchase of aQuantive inFY08? How about the journal entry to record the impairment inFY12?

How should users of financials statements use this information toassess Microsofts ability to generate future cash flows?


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INFERRING JOURNAL ENTRIESAlthough many different events might affect any given account,there are generally standard transactions that affect eachbalance sheet account.

Examples: For each account, think about what will make theaccount increase and what will make the account decrease:

Balance Sheet Account Increase DecreaseAccounts Receivable

Interest Receivable

Merchandise Inventory

Supplies Inventory

Prepaid Insurance

Prepaid Rent

Property, Plant & Equip

Accounts Payable

Wages Payable

Interest Payable

Unearned Revenue

Therefore, if you know the changein a balance sheet account fromthe beginning of a period to the end of a period (the net increase ordecrease in the account), AND you know one reason for thechange you can infer the other reason for the change.


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Practice Problem:Following is selected balance sheet information from Koas Kitty Food, Inc. for theyears ended December 31, 2011 and 2012.

Account 12/31/11 12/31/12

Accounts Receivable 8,500 9,000Merchandise Inventory 10,100 9,600Prepaid Rent 2,400 2,000

Accounts Payable 8,900 7,900Wages Payable 1,900 2,000

In addition, the following information for the year ended 12/31/12 is provided toyou:

Accrual sales $24,500

Cash paid to suppliers for inventory purch. on account 13,700Rent Expense 3,400Cash paid for wages 4,700

Using this information, compute the following (NOTE: Assume thataccounts payable relates entirely to merchandise inventory):

a) Cash collected from customers $________________

b) Cash paid for rent expense $________________

c) Cost of goods sold $________________


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d) Wage expense $________________

This inference process is difficult but very useful. We will use itthroughout the quarter and you will see again in ACCTG303 whenyou cover the Statement of Cash Flows.


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INCOME STATEMENT PRESENTATION

Typical Income Statement Format:

Alternative: Single Step Format


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Does it matter?

How should irregular or unusual economic events bereported?

Options:

1. Combined with other revenue and/or expense line items

2. Include as a separate line item in the income statement

And include in calculation of income from continuingoperations

And exclude from calculation of income from continuingoperations

3. By-pass net income and record directly to retained earnings

Why is this important?


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Example: Coca-Cola Enterprises

Examine the following Statement of Income and excerpts from theNotes to the Consolidated Financial Statements (next page).

Did CCE have any unusual or irregular items during 2005?


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Types of irregular items:

1. Economic events

a. Discontinued operations (SFAS #144, ASC 205-20):Component of a company 1) that has or will be eliminatedfrom the operations of the company and 2) that the companywill not have any significant continuing involvement in afterdisposal

What constitutes a component?

Why does it matter?

Two components: 1) Loss from operation of discontinuedsegment, 2) Loss on disposal of discontinued segment

Example: Company disposes of a segment that had operatinglosses for the year of $40,000 and that resulted in loss of$10,000 on disposal. Tax rate is 40% and income fromcontinuing operations is $200,000.


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Example of discontinued operations from Best Buy 10-KConsolidated Statements of Earnings

$ in millions, except per share amounts

March 3,

2012February 26,

2011February 27,

2010

Revenue $ 50,705 $ 49,747 $ 49,243

Cost of goods sold 38,113 37,197 37,201

Restructuring chargescost of goods sold 19 9

Gross profit 12,573 12,541 12,042

Selling, general and administrative expenses 10,242 10,029 9,622

Restructuring charges 39 138 52

Goodwill impairment 1,207

Operating income 1,085 2,374 2,368

Other income (expense)

Gain on sale of investments 55

Investment income and other 37 43 53

Interest expense (134) (86) (92)Earnings from continuing operations before income tax expense and

equity in (loss) income of affiliates 1,043 2,331 2,329

Income tax expense 709 779 835

Equity in (loss) income of affiliates (4) 2 1

Net earnings from continuing operations 330 1,554 1,495

Loss from discontinued operations (Note 3), net of tax of $89, $65 and$33 (308) (188) (101)

Net earnings including noncontrolling interests 22 1,366 1,394

Net (earnings) from continuing operations attributable to noncontrollinginterests (1,387) (127) (96)

Net loss from discontinued operations attributable to noncontrollinginterests 134 38 19

Net (loss) earnings attributable to Best Buy Co., Inc. $ (1,231) $ 1,277 $ 1,317

Basic (loss) earnings per share attributable to Best Buy Co., Inc.

Continuing operations $ (2.89) $ 3.51 $ 3.36

Discontinued operations (0.47) (0.37) (0.20)

Basic (loss) earnings per share $ (3.36) $ 3.14 $ 3.16

Diluted (loss) earnings per share attributable to Best Buy Co., Inc.

Continuing operations $ (2.89) $ 3.44 $ 3.29

Discontinued operations (0.47) (0.36) (0.19)

Diluted (loss) earnings per share $ (3.36) $ 3.08 $ 3.10

Weighted-average common shares outstanding (in millions)

Basic 366.3 406.1 416.8

Diluted 366.3 416.5 427.5


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3. Discontinued Operations

During fiscal 2011 and the first three quarters of fiscal 2012, we determined that the aggregate financial resultsfrom discontinued operations were not material, and therefore, we did not separately present discontinuedoperations in our consolidated financial statements. During the fourth quarter of fiscal 2012, we determined thatwith the discontinuation of our large-format Best Buy branded stores in the U.K., aggregate discontinued operationswere material and would require separate presentation. We therefore commenced discontinued operations

presentation during the fourth quarter of fiscal 2012, and included the results of all operations discontinued duringfiscal 2012 and fiscal 2011. We did not discontinue any operations during fiscal 2010. The discontinued operationspresentation has been retrospectively applied to all prior periods presented.

Discontinued operations comprise the following:

Domestic Segment

SpeakeasyDuring the second quarter of fiscal 2011, we completed the sale of Speakeasy to CovadCommunications. Speakeasy's operations primarily comprised internet-based telephony services. In considerationfor the sale of Speakeasy, Best Buy received cash consideration and a minority equity interest in the combinedoperations. We do not exercise significant influence over the combined operations. Based upon the fair value of the

consideration received and the carrying value of Speakeasy at closing, we recorded a pre-tax gain on sale of $7 inthe second quarter of fiscal 2011.

NapsterDuring the third quarter of fiscal 2012, we sold certain assets comprising the domestic operations ofNapster, Inc. to Rhapsody International and ceased operations in the U.S. Napster's operations comprised digitalmedia download and streaming services in the U.S. In consideration for the sale of these assets, Best Buy received aminority investment in Rhapsody International. We do not exercise significant influence over RhapsodyInternational.

International Segment

Best Buy ChinaDuring the fourth quarter of fiscal 2011, we announced the restructuring of our eight large-format

Best Buy branded stores in China. The closure of Best Buy branded stores was completed in the first quarter offiscal 2012. Our fiscal 2011 restructuring activities included plans to restructure the large-format Best Buy brandedstores in China.

Best Buy TurkeyDuring the fourth quarter of fiscal 2011, we announced the closure of our two large-format BestBuy branded stores in Turkey. The exit activities were completed during the second quarter of fiscal 2012, at whichtime we recorded a $4 pre-tax gain on the sale of certain assets related to the stores.

Best Buy U.K.During the third quarter of fiscal 2012, we announced the closure of our eleven large-format BestBuy branded stores in the U.K. We completed the exit activities associated with these stores during the fourthquarter of fiscal 2012.

Belgium

During the fourth quarter of fiscal 2012, Best Buy Europe sold its retail business in Belgium, consistingof 82 small-format The Phone House stores, to Belgacom S.A. As a result of the sale, a pre-tax gain of $5 wasrecorded in fiscal 2012.


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$ in millions, except per share amounts or as otherwise noted

The financial results of discontinued operations for fiscal 2012 , 2011 and 2010 were as follows:

2012 2011 2010

Revenue $ 411 $ 525 $ 451

Restructuring charges 229 75

Loss from discontinued operations before income tax benefit (406) (260) (134)

Income tax benefit 89 57 33

Gain on sale of discontinued operations 9 7

Income tax benefit on sale 8

Net loss from discontinued operations includingnoncontrolling interests (308) (188) (101)

Net loss from discontinued operations attributable tononcontrolling interests 134 38 19

Net loss from discontinued operations attributable to BestBuy Co., Inc. $ (174) $ (150) $ (82)

(1) See Note 7,Restructuring Charges , for further discussion of the restructuring charges associated with discontinued operations.


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b. Extraordinary items: Income items that are unusual andinfrequent

c. Other unusual/irregular items: Income items that areunusual or infrequent (but not both)

What are managers incentives for reporting these items?

Accounting for discontinued operations is similar underIFRS except that what constitutes a component of acompany is much narrower (the FASB and IASB areworking on a joint project to converge their two standards).

Also, IFRS does not allow any items in the incomestatement or the notes to be called extraordinary.


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Practice ProblemShepard Industries is a manufacturer of medical devices. During 2012,several unusual events occurred at Shepard Industries:

The company sold a subsidiary, Shepard Financing, that providedfinancing to customers to assist them in purchasing some of themore expensive items in the companys product line. Thecompany no longer offers financing directly but providescustomers with referrals to financing companies that provide suchservices. Prior to the sale, Shepard Financing incurred a loss of$200,000. The sale of the subsidiary resulted in a gain of$50,000.

The company incurred damage to one of their production facilitiesin Arizona, resulting from a tornado. Tornados are highly unusualoccurrences in the area. The damage sustained to the buildings,equipment, and inventory totaled $80,000

Due to poor performance, the company announced a restructuringplan to reorganize its business units and streamline production.The restructuring plan included layoffs of 2,000 personnel and the

disposal of non-productive assets and inventory fromunderperforming product lines. The cost of the restructuring was$130,000.

Excluding these items, the company had revenues of $1,000,000,Cost of Goods Sold of $600,000, and Selling, General and

Administrative Expenses of $180,000.

The companys income tax rate is 30%.

The company has (and always had) 100,000 shares of commonstock outstanding and no preferred stock.

Prepare an income statement for Shepard Industries for the year endedDecember 31, 2012, in good form (space available on next page).


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Shepard IndustriesStatement of Income

For the Year Ended 12/31/2012


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2. Accounting related (SFAS #154, effective from January 1, 2006)a. Corrections of errors: Error in financial statement resulting

from mistake, misapplication of GAAP or misuse of facts

b. Changes in accounting principles: A change from oneallowable method under GAAP to another (voluntary change)or as a result of a rule change (mandatory change)

c. Changes in accounting estimates: Normal, recurringcorrections/ adjustments to estimates in the financialstatements


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COMPREHENSIVE INCOME (SFAS #30; ASC 220-10)All changes in equity except those resulting from investments byor distributions to owners

Comprehensive income = NI +Other Comprehensive Income (OCI)

Common items in OCI:

Impetus for this standard:

Presentation Option (originally):

1. Separate Statement

2. Combined Statement

3. Statement of Stockholders equity

New Requirement: ASU 2011-05


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The Boeing Company and SubsidiariesConsolidated Statements of Comprehensive Income

(Dollars in millions)

Years ended December 31, 2012 2011 20

Net earnings $3,900 $4,018 $3,3

er comprehensive (loss)/income, net of tax:

Currency translation adjustments 17 (35)nrealized loss on certain investments, net of tax of $0, $1 and $0 (2)

Unrealized gain/(loss) on derivative instruments:

Unrealized gain/(loss) arising during period, net of tax of ($13), $7 and ($22) 25 (13)

Reclassification adjustment for (gain)/loss included in net earnings, net of tax of$3, $9 and $5 (5) (16)

Total unrealized gain/(loss) on derivative instruments, net of tax 20 (29)

efined benefit pension plans & other postretirement benefits:

Prior service cost arising during the period, net of tax of $9, ($195) and $4 (16) 338

Amortization of prior service cost included in net periodic pension cost, net of taxof ($10), ($54) and ($57) 18 94 1

Net actuarial loss arising during the period, net of tax of $1,382, $2,297 and$1,506 (2,401) (3,993) (2,6

Amortization of actuarial losses included in net periodic pension cost, net of taxof ($752), ($523) and ($305) 1,304 909 5

Settlements and curtailments included in net income, net of tax of ($9), ($25)and ($5) 15 42

Pension and post retirement benefits related to our equity method investments,net of tax ($74), $38 and ($34) 127 (66)

Total defined benefit pension plans & other postretirement benefits, net of tax (953) (2,676) (1,9

Other comprehensive loss, net of tax (916) (2,742) (1,8

omprehensive income/(loss) related to non-controlling interest 3 (1)

Comprehensive income, net of tax $2,987 $1,275 $1,4


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BALANCE SHEET AND DISCLOSURES

Purpose:

Typical Format:

Does classification matter?

Limitations:


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Target CorporationConsolidated Statements of Financial Position

(millions, except footnotes)February 2,

2013January 28,

2012

AssetsCash and cash equivalents, including short-term investments of$130 and $194$ 784$ 794Credit card receivables, held for sale 5,841 Credit card receivables, net of allowance of$0 and $430 5,927Inventory 7,903 7,918Other current assets 1,860 1,810

Total current assets 16,388 16,449Property and equipment

Land 6,206 6,122Buildings and improvements 28,653 26,837Fixtures and equipment 5,362 5,141Computer hardware and software 2,567 2,468Construction-in-progress 1,176 963

Accumulated depreciation (13,311) (12,382)

Property and equipment, net 30,653 29,149Other noncurrent assets 1,122 1,032Total assets $ 48,163$ 46,630

Liabilities and shareholders' investmentAccounts payable $ 7,056$ 6,857Accrued and other current liabilities 3,981 3,644Unsecured debt and other borrowings 1,494 3,036Nonrecourse debt collateralized by credit card receivables 1,500 750Total current liabilities 14,031 14,287Unsecured debt and other borrowings 14,654 13,447Nonrecourse debt collateralized by credit card receivables 250Deferred income taxes 1,311 1,191Other noncurrent liabilities 1,609 1,634

Total noncurrent liabilities 17,574 16,522Shareholders' investment

Common stock 54 56Additional paid-in capital 3,925 3,487Retained earnings 13,155 12,959Accumulated other comprehensive loss

Pension and other benefit liabilities (532) (624)Currency translation adjustment and cash flow hedges (44) (57)

Total shareholders' investment 16,558 15,821Total liabilities and shareholders' investment $ 48,163$ 46,630

Common StockAuthorized 6,000,000,000 shares, $0.0833 par value; 645,294,423 shares issued and

outstanding at February 2, 2013; 669,292,929 shares issued and outstanding at January 28, 2012.

Preferred StockAuthorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding atFebruary 2, 2013 or January 28, 2012.

See accompanying Notes to Consolidated Financial Statements.

Other Important Disclosures/Elements of Financial Statements:


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Notes to the Financial Statements

Management Discussion and Analysis

Auditors Report

FINANCIAL STATEMENT ANALYSIS


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General principles:

Scaling: Numbers need to be scaled to be economicallymeaningful

o Common size financial statements

I/S: Express all line items as a % of sales

B/S: Express all line items as a % of assets

o Ratios Divide line items in economically meaningful way

Benchmarks: Need to compare to something to be useful

Common ratios: Liquidity: Ability to pay debts as they come due in the short-

term

Current ratio:

Quick Ratio:

Solvency: Ability to pay debts when they come due in the

long-term

Debt to equity:

Times interest earned:


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Activity: Effectiveness of asset use

Receivables turnover

Inventory turnover

Asset turnover

Profitability: Ability to generate wealth in the long-term

Profit margin

Return on Assets (ROA)

Return on Equity (ROE)

ROE = Profit Margin Asset turnover (1+Leverage)

Example: Nordstrom vs. Costco


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Nordstrom and Costco are both retailing giants but they have verydifferent business models.

Which ratios above, would you expect to differ between the twocompanies?

The following are selected data from Nordstrom and Costco for 2012 (inmillions):

Nordstrom CostcoSales 12,148 99,137COGS 7,432 86,823Net Income 735 1,709

Receivables 2,081 996Inventory 1,254 6,867Current Assets 5,321 13,616Total Assets 8,290 26,951Total Debt 6,356 14,405Current Liabilities 2,401 12,155Shareholders Equity 1,935 12,546

Were your intuitions correct?

lecture notes - 1-9

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