ANALYSIS OF THE FINANCIAL STATEMENTS OF A PUBLICLY This Comprehensive Problem is to acquaint you with the content of the 2015 financial state ments of Home Depot, Inc., reproduced in Appendix A of this textbook. (The 2015 financial statements are for the fiscal year ended January 31, 2016.) The problem contains three major parts, which are independent of one another: Part / is designed to familiarize you with the general contents of a company's financial statements: Part Il involves analysis of the com COM! Home Depot, Inc. OWNED CORPORATION pany's liquidity, and Parrill analyzes the trend in its profitability if you work this problem as a group assignment, each group member should be prepared to discuss the group's findings and conclusions in class. A good starting point for understanding the financial statements of a company such as Home Depot, Inc., is to understand the accounting policies used in preparing those state ments. The first note accompanying the financial statements provides a brief description of the major accounting policies the company used. Most of the areas discussed in this note have been covered in this text. Part 1 Annual reports include not only comparative financial statements but also other sources of information, such as: A multiyear summary of financial highlights, a summary of key statistics for the past 5 or 10 years. Several pages of Notes that accompany the financial statements. Reports by management and by the independent auditors in which they express their respective responsibilities for the financial statements. C. Instructions Answer each of the following questions and explain where in the statements, notes, or other sections of the annual report you located the information used in your answer. a. How many years are covered in each of the primary comparative financial statements? Were all of these statements audited? Name the auditors. What were the auditors' conclusions con- cerning these statements? b. Home Depot, Inc., combines its statement of retained earnings with another financial state- ment. Where are details about changes in the amount of retained earnings found? Over the three years presented, have the company's annual net cash flows been positive or negative from (1) operating activities, (2) investing activities, and (3) financing activities? Has the company's cash balance increased or decreased during each of these three years? Part II Assume that you are the credit manager of a medium-size supplier of building mate- rials and related products. Home Depot wants to make credit purchases from your company, with payment due in 60 days. Instructions a. As general background, read the first note to the financial statements, "Summary of Significant Accounting Policies." Next, compute the following for the fiscal years ending January 31, 2016, and February 1, 2015 (round percentages to the nearest tenth of 1 percent, and other computations to one decimal place). 1. Current ratio. 2. Quick ratio. 3. Amount of working capital b. C. 4 Percentage change in working capital from the prior year. 5. Percentage change in cash and cash equivalents from the prior year. On the basis of your analysis in part, does the company's liquidity appear to have increased or decreased during the most recent fiscal year? Explain Other than the ability of Home Depot to pay for its purchases, do you see any major consider ations that should enter into your company's decision? Explain. Your company assigns each customer one of the four credit ratings listed below. Asigna credit rating to Home Depot, Inc., and write a memorandum explaining your decision your memorandum, you may refer to any of your computations or obvions in parts through c, and to any information contained in the annual report.) d. POSSIBLE CREDIT RATINGS A. Outstanding Little or no risk of inability to pay. For customers in this category, we fill any reasonable order without imposing a credit limit. The customer's credit is reevaluated annually. B. Good Customer has good debt-paying ability but is assigned a credit limit that is reviewed every 90 days. Orders above the credit limit are accepted only on a cash basis. c. Marginal Customer appears sound, but credit should be extended only on a 30-day basis and with a relatively low credit limit. Creditworthiness and credit limit are reevaluated every 90 days. D. Unacceptable Customer does not qualify for credit. Part III As general background, study the "Five-Year Summary of Financial and Operating Results. a. Instructions Compute the following for the fiscal years ending January 31, 2016, and February 1, 2015 (round percentages to the nearest tenth of 1 percent): 1. Percentage change in net sales (relative to the prior year). 2. Percentage change in net earnings. 3. Gross profit rate. 4. Net income as a percentage of sales. 5. Return on average total assets. 6. Return on average total equity. b. Write a statement that describes your conclusion(s) concerning trends in Home Depot's prof- itability during the period covered in your analysis in part a above. Justify your conclusion(s). A4 Appendix A Home Depot 2015 Financial Statements THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended) January 31, February 1, 2016 2015 88,519 $ 83,176 58,254 54.787 30,265 28,389 February 2, 2014 $ 78.812 51,89 26915 16,801 1,690 18,491 11,774 16,280 1.640 17,920 10,469 16.122 1.627 17.749 amounts in millions, exceper share date NET SALES Cost of Sales GROSS PROFIT Operating Expenses Selling. General and Administrative Depreciation and Amortization Total Operating Expenses OPERATING INCOME Interest and Other (Income) Expense: Interest and Investment Income Interest Expense Interest and Othernet EARNINGS BEFORE PROVISION FOR INCOME TAXES Provision for Income Taxes NET EARNINGS Weighted Average Common Shares BASIC EARNINGS PER SHARE Diluted Weighted Average Common Shares DILUTED EARNINGS PER SHARE (166) 919 753 11,021 4,012 7,009 1,277 5.49 1,283 5.46 (337) 830 493 9,976 3,631 6,345 1.338 4.74 1,346 4.71 711 699 8,467 3.082 5.385 1425 3.78 1.434 3.76 $ $ $ $ $ $ Fiscal years ended January 31, 2016 February 2, 2015 and February 2, 2014 include 52 weeks. accompanying Notes to Consolidated Financial Statements. ANALYSIS OF THE FINANCIAL STATEMENTS OF A PUBLICLY This Comprehensive Problem is to acquaint you with the content of the 2015 financial state ments of Home Depot, Inc., reproduced in Appendix A of this textbook. (The 2015 financial statements are for the fiscal year ended January 31, 2016.) The problem contains three major parts, which are independent of one another: Part / is designed to familiarize you with the general contents of a company's financial statements: Part Il involves analysis of the com COM! Home Depot, Inc. OWNED CORPORATION pany's liquidity, and Parrill analyzes the trend in its profitability if you work this problem as a group assignment, each group member should be prepared to discuss the group's findings and conclusions in class. A good starting point for understanding the financial statements of a company such as Home Depot, Inc., is to understand the accounting policies used in preparing those state ments. The first note accompanying the financial statements provides a brief description of the major accounting policies the company used. Most of the areas discussed in this note have been covered in this text. Part 1 Annual reports include not only comparative financial statements but also other sources of information, such as: A multiyear summary of financial highlights, a summary of key statistics for the past 5 or 10 years. Several pages of Notes that accompany the financial statements. Reports by management and by the independent auditors in which they express their respective responsibilities for the financial statements. C. Instructions Answer each of the following questions and explain where in the statements, notes, or other sections of the annual report you located the information used in your answer. a. How many years are covered in each of the primary comparative financial statements? Were all of these statements audited? Name the auditors. What were the auditors' conclusions con- cerning these statements? b. Home Depot, Inc., combines its statement of retained earnings with another financial state- ment. Where are details about changes in the amount of retained earnings found? Over the three years presented, have the company's annual net cash flows been positive or negative from (1) operating activities, (2) investing activities, and (3) financing activities? Has the company's cash balance increased or decreased during each of these three years? Part II Assume that you are the credit manager of a medium-size supplier of building mate- rials and related products. Home Depot wants to make credit purchases from your company, with payment due in 60 days. Instructions a. As general background, read the first note to the financial statements, "Summary of Significant Accounting Policies." Next, compute the following for the fiscal years ending January 31, 2016, and February 1, 2015 (round percentages to the nearest tenth of 1 percent, and other computations to one decimal place). 1. Current ratio. 2. Quick ratio. 3. Amount of working capital b. C. 4 Percentage change in working capital from the prior year. 5. Percentage change in cash and cash equivalents from the prior year. On the basis of your analysis in part, does the company's liquidity appear to have increased or decreased during the most recent fiscal year? Explain Other than the ability of Home Depot to pay for its purchases, do you see any major consider ations that should enter into your company's decision? Explain. Your company assigns each customer one of the four credit ratings listed below. Asigna credit rating to Home Depot, Inc., and write a memorandum explaining your decision your memorandum, you may refer to any of your computations or obvions in parts through c, and to any information contained in the annual report.) d. POSSIBLE CREDIT RATINGS A. Outstanding Little or no risk of inability to pay. For customers in this category, we fill any reasonable order without imposing a credit limit. The customer's credit is reevaluated annually. B. Good Customer has good debt-paying ability but is assigned a credit limit that is reviewed every 90 days. Orders above the credit limit are accepted only on a cash basis. c. Marginal Customer appears sound, but credit should be extended only on a 30-day basis and with a relatively low credit limit. Creditworthiness and credit limit are reevaluated every 90 days. D. Unacceptable Customer does not qualify for credit. Part III As general background, study the "Five-Year Summary of Financial and Operating Results. a. Instructions Compute the following for the fiscal years ending January 31, 2016, and February 1, 2015 (round percentages to the nearest tenth of 1 percent): 1. Percentage change in net sales (relative to the prior year). 2. Percentage change in net earnings. 3. Gross profit rate. 4. Net income as a percentage of sales. 5. Return on average total assets. 6. Return on average total equity. b. Write a statement that describes your conclusion(s) concerning trends in Home Depot's prof- itability during the period covered in your analysis in part a above. Justify your conclusion(s). A4 Appendix A Home Depot 2015 Financial Statements THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended) January 31, February 1, 2016 2015 88,519 $ 83,176 58,254 54.787 30,265 28,389 February 2, 2014 $ 78.812 51,89 26915 16,801 1,690 18,491 11,774 16,280 1.640 17,920 10,469 16.122 1.627 17.749 amounts in millions, exceper share date NET SALES Cost of Sales GROSS PROFIT Operating Expenses Selling. General and Administrative Depreciation and Amortization Total Operating Expenses OPERATING INCOME Interest and Other (Income) Expense: Interest and Investment Income Interest Expense Interest and Othernet EARNINGS BEFORE PROVISION FOR INCOME TAXES Provision for Income Taxes NET EARNINGS Weighted Average Common Shares BASIC EARNINGS PER SHARE Diluted Weighted Average Common Shares DILUTED EARNINGS PER SHARE (166) 919 753 11,021 4,012 7,009 1,277 5.49 1,283 5.46 (337) 830 493 9,976 3,631 6,345 1.338 4.74 1,346 4.71 711 699 8,467 3.082 5.385 1425 3.78 1.434 3.76 $ $ $ $ $ $ Fiscal years ended January 31, 2016 February 2, 2015 and February 2, 2014 include 52 weeks. accompanying Notes to Consolidated Financial Statements