Auditors are extremely reluctant to publish any projections of future financial performance for the companies they are auditing. Ernst & Young LLP obviously has made no such predictions in its audit of Wal-Mart’s 2009 financial performance (see the “Report of Independent Registered Public Accounting Firm” in Appendix A). However, the Management’s Discussion and Analysis of Results of Operations and Financial Condition, in the section titled “Forward-Looking Statements,” provides some important guidance about statements made by management regarding expectations about future financial performance at Wal-Mart. Elsewhere in the management discussion are insights useful in predicting future operating expenses, interest income, and income taxes. These discussions can be extremely important to investors who are trying to understand what Wal-Mart plans to do in its 2010 fiscal year. Essentially, these investors need to put together their own pro-forma financial statements on Wal-Mart for use in planning, controlling, and evaluating their investment decisions in this company.
Consider the 2009 income statement below and use the information provided in Wal-Mart’s management discussion under “Forward-Looking Statements,” as well as any other comments in the management’s discussion that you might find useful, to prepare your own pro-forma 2010 income statement for Wal-Mart. Be sure to read and consider each item in the management discussion relating to Wal-Mart’s income statement provided in the annual report in Appendix A. You may also want to consider the 2007 and 2008 revenue and cost trends from the income statement published in this same annual report. For each line item (i.e., for each revenue and cost category), briefly defend the budget number you chose to use.
2009
(amounts in millions)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 405,607
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(306,158)
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,449
Operating, selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . (76,651)
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,798
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,900)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 20,898
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(7,145)
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(499)
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 13,254