a. Assuming that walmart had no significant permanent differences between book income and taxable income, did income before tax for financial reporting exceed or fall short of taxable income for 2010? explain.
ACT 444 Spring 2014 Exam 1 Take Home Part Name: ______________________ Instructions: 1.You may use your book and notes for this exam take home part, but you may not discuss the questions or related ideas with any other person while you are taking the exam. 2.If you have to make any assumption(s) to answer any of the problems, please state your assumption(s) clearly, and explain why you needed to make the assumption(s). 3. Sign the honor code pledge after completing the examination. 4.Show all workings for full credit. Good Luck Honor Code Pledge: I have neither given nor received any unauthorized assistance on this examination. . 1 Problem 1: (15 points) Refer to the balance sheet and note 13 (Commitments) of Wal-Mart in Appendix. Required: 1. Did Wal-Mart report a liability for its operating lease on January 31, 2011 balance sheet? By how much? 2. Did Wal-Mart report a liability for its capital lease on January 31, 2011 balance sheet? By how much? 3. Did Wal-Mart report an asset for its operating lease on January 31, 2011 balance sheet? By how much? 4. Did Wal-Mart report an asset for its capital lease on January 31, 2011 balance sheet? By how much? 5. Assuming an interest rate of 5%, compute the present value of the operating lease commitments on January 31, 2011. Show all calculations for credit. 2 6. Calculate the Liabilities to Assets ratio and Long-term Debt Ratio for Wal-Mart as of January 31, 2011, using the amounts originally reported in its balance sheet for the year. 7. Assuming that Wal-Mart was required to capitalize its operating lease, calculate the company's 2011's Liabilities to Assets ratio and Long-term Debt Ratio. 8. Comment on the results from part 6 and 7. 3 Problem 2: (15 points) \"Why can't we pay our shareholders a dividend?\" shouted your new boss. \"This income statement you prepared for me says we earned $5 million in our first half-year!\" You were hired last month as the chief accountant for Cilca Corporation which was organized on July 1 of the year just ended. You recently prepared the financial statements below: Cilca Corporation Income Statement For the Six Months Ended December 31, 2013 ($ in million) Sales Revenue $ 75 Cost of Goods Sold (30) Depreciation Expense (5) Remaining Expenses (35) Net Income $5 Cilca Corporation Balance Sheet December 31, 2013 ($ in million) Current Assets: Cash Accounts Receivable, Net Inventory Total Current Assets Property, Plant, and Equipment, Net Total Assets Current Liabilities: Accounts Payable Accrued expenses payable Total Current Liabilities Notes Payable Total Liabilities Stockholders' Equity: Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity $1 20 15 36 44 $80 $2 7 9 36 45 30 5 35 $80 You have just explained to your boss, Robert James, that although net income was $5 million, operating activities produced a net decrease in cash. Unable to understand your verbal explanation, he has asked you to prepare a written report. 4 Required: Prepare a report explaining the apparent discrepancy between Cilca's profitability and its cash flows. To increase the chances of your boss' understanding the situation, please include in your report the following items: (1) Statement of Cash Flows (using both direct and indirect methods). (2) A narrative explanation of how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flow from operations, and (3) How operating, investing and financing cash flows are related to the various stages of the product life cycle. (Hint: as Cilca organized on July 1, 2013, all the beginning balances on balance sheet accounts are zeros.) 5 6 Problem 3: (5 points) The financial statement of Wal-Mart Stores, Inc. revealed the following information regarding the firm's income taxes: Income from Continuing Operations The components of income from continuing operations before income taxes are as follows: Fiscal Years Ended January 31, (Amounts 2011 2010 2009 in millions) U.S. $ 18,398 $ 17,705 $ 16,212 Non-U.S. 5,140 Total income from continuing operations before income taxes 4,413 4,655 $ 23,538 $ 22,118 $ 20,867 A summary of the provision for income taxes is as follows: Fiscal Years Ended January 31, (Amounts 2011 millions) 2009 As in 2010 As Adjusted Adjusted Current: U.S. federal U.S. state and local 7 $ 4,600 $ 5,798 $ 637 599 4,771 564 International 1,466 1,229 6,703 Total current tax provision 1,246 7,643 6,564 Deferred: U.S. federal 818 (432) 603 U.S. state and local 39 78 41 International 19 (133) (75) 876 (487) 569 7,579 $ 7,156 $ Total deferred tax provision $ 7,133 Total provision for income taxes Deferred Taxes The significant components of our deferred tax account balances are as follows: January 31, (Amounts in 2011 2010 millions) Deferred tax assets: Loss and tax credit carryforwards Accrued liabilities Share-based compensation 8 $ 2,968 $ 2,713 3,532 3,141 332 267 Other 708 7,540 Valuation allowance Deferred tax assets, net of valuation allowance 6,872 (2,899) Total deferred tax assets 751 (2,167) $ 4,641 $ 4,705 $ 4,848 $ 4,015 1,488 1,581 6,336 5,596 Deferred tax liabilities: Property and equipment Other Total deferred tax liabilities $ 1,695 $ 891 Net deferred tax liabilities Required: a. Assuming that Wal-Mart had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2010? Explain. 9 b. Assuming that Wal-Mart had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2011? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2010? d. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2011? e. Wal-Mart uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability? 10 Appendix WAL-MART STORES, INC. Consolidated Balance Sheets As of January 31, (Amounts millions in 2011 except 2010 As Adjusted per share data) ASSETS Current assets: Cash and cash equivalents Receivables, net $ 7,395 $ 7,907 5,089 4,144 36,318 32,713 2,960 3,128 131 140 51,893 48,032 Land 24,386 22,591 Buildings and improvements 79,051 73,657 Fixtures and equipment 38,290 34,035 Transportation equipment 2,595 2,355 Construction in process 4,262 5,210 Inventories Prepaid expenses and other Current assets of discontinued operations Total current assets Property and equipment: 11 148,58 Property and equipment 137,848 4 Less accumulated depreciation (43,486) 105,09 Property and equipment, net (38,304) 99,544 8 Property under capital leases: Property under capital leases 5,905 5,669 (3,125) (2,906) 2,780 2,763 16,763 16,126 4,129 3,942 $ 180,66 $ 170,407 Less accumulated amortization Property under capital leases, net Goodwill Other assets and deferred charges Total assets 3 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings 12 $ 1,031 $ 523 Accounts payable 33,557 30,451 Accrued liabilities 18,701 18,734 157 1,347 4,655 4,050 336 346 47 92 58,484 55,543 40,692 33,231 Long-term obligations under capital leases 3,150 3,170 Deferred income taxes and other 6,682 5,508 408 307 Preferred stock ($0.10 par value; 100 shares authorized, none issued) Common stock ($0.10 par value; 11,000 shares authorized, 3,516 and 3,786 issued and 352 378 3,577 3,803 Accrued income taxes Long-term debt due within one year Obligations under capital leases due within one year Current liabilities of discontinued operations Total current liabilities Long-term debt Redeemable noncontrolling interest Commitments and contingencies Equity: outstanding at January 31, 2011 and 2010, respectively) Capital in excess of par value 13 Retained earnings 63,967 Accumulated other comprehensive income (loss) 646 66,357 (70) 68,542 70,468 2,705 2,180 71,247 72,648 $ 180,66 $ 170,407 Total Walmart shareholders' equity Noncontrolling interest Total equity Total liabilities and equity 3 Note 13. Commitments The Company and certain of its subsidiaries have long-term leases for stores and equipment. Rentals (including amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under operating leases and other short-term rental arrangements were $2.0 billion in fiscal 2011 and $1.8 billion in each of fiscal 2010 and 2009. Aggregate minimum annual rentals at January 31, 2011, under non-cancelable leases are as follows: (Amounts in millions) Fiscal Year Operating Capital Leases Leases 2012 2013 1,336 574 2014 14 $ 1,406 $ 609 1,271 545 1,205 496 2016 1,120 462 Thereafter 7,785 3,230 $ 14,123 $ 5,916 2015 Total minimum rentals (51) Less estimated executory costs 5,865 Net minimum lease payments Less imputed interest (2,37) 9 $ 3,486 Present value of minimum lease payments Certain of the Company's leases provide for the payment of contingent rentals based on a percentage of sales. Such contingent rentals were immaterial for fiscal years 2011, 2010 and 2009. Substantially all of the Company's store leases have renewal options, some of which may trigger an escalation in rentals. In connection with certain debt financing, we could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2011, the aggregate termination payment would have been $84 million. The arrangements pursuant to which these payments could be made expire in fiscal 2019. The Company has future lease commitments for land and buildings for approximately 424 future locations. These lease commitments have lease terms ranging from 4 to 30 years and provide for certain minimum rentals. If executed, payments under operating leases would increase by $109 million for fiscal 2012, based on current cost estimates. 15
