ANNUAL FINANCIAL REPORT PROJECT ON WALMART - Essay Example

Wal-Mart values its inventories at the lower of cost or market value, which essentially means if the market value of inventory falls, the company will write-down the inventory value in its balance sheet. Wal-Mart is divided into three segments: Wal-Mart U.S, Wal-Mart International and Sam’s Club. All of the merchandise related to the U.S segment is valued using the Last in First out (LIFO) method. LIFO is an inventory valuation method allowed under US GAAP but not under IFRS (CFA institute, 2012).

LIFO assumes that inventory items purchased most recently are sold first and hence the items remaining in the inventory are assumed to be the oldest items purchased. In period of rising prices, LIFO reports a higher cost of sales and lower ending inventory figure than other inventory valuation methods. Higher cost of sales lead to lower gross profit and hence results in tax savings. The company reports a LIFO reserve in its annual statements for reconciliation of LIFO cost of sales and inventory with FIFO cost of sales and inventory.

This is to ensure that comparisons can be made with other companies in the retail industry that use FIFO as their inventory valuation method. Wal-Mart’s inventory turnover rate has been on the lower side considering the diverse range of product it sells. Inventory turnover rate fell from 8.6 times in 2011 to 8.2 times in 2012 which means that it took almost 44 days for Wal-Mart to convert its inventory into sales in 2012 and 42 days in 2011. Wal-Mart uses accrual accounting to prepare its annual statements.

Accrual accounting is different from cash accounting in the sense that in accrual accounting revenues are recorded when they are earned and expenses are recorded when they are incurred whereas in cash accounting revenues are recorded when the money is received and expenses are recorded when cash is paid out (Investopedia, 2009). Wal-Mart has accrued liabilities of $18.154B indicating that these liabilities are due and Wal-Mart has not yet paid them. Moreover, prepaid expenses amounted to $1.685B in 2012 indicating that these expenses have already been paid in advance (Wal-Mart, 2012).

In cash accounting, prepaid expenses and accrued liabilities are not recorded since these are obligations that are due but no cash outflow has been made in lieu of these obligations. Accrual accounting can be manipulated to show higher earnings by using estimates that inflate the income. For instance, unjustly inflating the ending inventory figure can result in a lower cost of sales and consequently inflate the net income of a company. In Wal-Mart’s case, figures are presented conservatively so that the income is not inflated unreasonably.

The receivables of Wal-Mart increased by 16.7% from 5.089B in 2011 to $ 5.937B in 2012 (Wal-Mart, 2012). Wal-Mart records a provision for doubtful debts, which is a contra-asset account and is recorded to account for the prudence concept. According to the prudence concept, improbable expenses are recorded whereas improbable revenues are not accounted for. Provision for doubtful debts is created to account for debts that will remain unpaid. The reserve for doubtful accounts is based on historical trends in collection of the past due amounts that debtors owe to a company and on the write-off history of the company.

The total provision for doubtful accounts increased by 28% from $252M in 2011 to $323M in 2012