Case 2.3 Walgreen Co. and Subsidiaries + - The following excerpts are from the 2013 Walgreen Co. Form 10-K: Consolidated Balance Sheets Zoom Out Walgreen Co. and Subsidiaries at August 31, 2013 and 2012 (in millions, except shares and per share amounts) 2013 2012 Assets Current Assets Cash and cash equivalents $ 2.108 $ 1.297 Accounts receivable, net 2.632 2.167 Inventories 6.852 7,036 Other current assets 284 260 Jotal Current Assets 11,874 10,760 Noncurrent Assets Property and equipment, at cost, less accumulated depreciation _ and amortization 12,138 12,038 Equity investment in Alliance Boots 6,261 6.140 Boots call 839 866 Goodwill 2.410 2,161 Other noncurrent assets 1.959 149 Total Noncurrent Assets 23,607 22,702 - Total Assets $ 35.481 $ 33.462 Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings $ 570 $ 1,319 Trade accounts payable 4.635 4,384 Accrued expenses and other liabilities 3,577 3.019 Income taxes 101 Total Current Liabilities 8,883 8,722 NonCurrent LiabilitiesAssets Current Assets Zoom Out Cash and cash equivalents $_2.106 $ 1,297 Accounts receivable, net 2,632 2.167 Inventories 6,85 7,036 Other current assets 284 260 Total Current Assets 11 874 10,760 Noncurrent Assets Property and equipment, at cost less accumulated depreciation _ and amortization 12,138 12,038 Equity investment in Alliance Boots 6,26 6,140 Alliance Boots call option 839 866 Goodwill 2,410 2,16 Other noncurrent assets 1.959 1.497 Total Noncurrent Assets 23,607 22,702 Total Assets $ 35,481 $ 33.462 Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings $ 570 $ 1,319 Trade accounts payable 4,635 4.384 Accrued expenses and other liabilities 3.57 3.019 Income taxes 101 Total Current Liabilities 8,88 8,72 Non Current Liabilities Long-term debt 4,477 4.073 Deferred income taxes 600 545 Other noncurrent liabilities 2.067 1,886 _Total Noncurrent Liabilities 7,144 6.504 Commitments and Contingencies (see Note)- - Total Noncurrent Assets 23,60 Zoom Out Total Assets $ 35,481 $ 33.462 Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings $ 570 $ 1,319 Trade accounts payable 1.635 1.384 Accrued expenses and other liabilities 3,577 3,019 Income taxes 101 Jotal Current Liabilities 8,883 8.722 NonCurrent Liabilities Long-term debt 4,477 4.073 Deferred income taxes 600 545 Other noncurrent liabilities 2.067 1.886 Total Noncurrent Liabilities 7,144 6,504 Commitments and Contingencies (see Note) Shareholders' Equity Preferred stock, $.0625 par value; authorized_ _ 32 million shares; none issued Common stock, $.078125 par value; authorized 3.2 billion shares; _ _issued 1,028,180,150 shares in 2013 and 2012 80 Paid-in capital 1.074 336 Employee stock loan receivable (11) 19 Retained earnings 21,523 20,156 Accumulated other comprehensive (loss) income 98) Treasury stock at cost, 81,584,572 shares in 2013 and 84, 124.816 shares_ _ in 2012 (3,114) (2.985) - Total Shareholders' Equity 19,454 18,236 _Total Liabilities and Shareholders' Equity $ 35.481 $ 33.462 The accompanying Notes to Consolidated Financial Statements are integral parts of these statements.Notes to Consolidated Financial Statements Zoom Out 1. Summary of Major Accounting Policies Description of Business The Company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31, 2013 there were 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011 Allowance for Doubtful Accounts The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (in millions): 2013 2012 2011 Balance at beginning of year 5 99 $ 101 $ 104 Bad debt provision 124 107 B8 Write-offs (69) (109) 9IT Balance at end of year $ 154 5 99 $ 101 Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively_Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense. 3. Leases The Company owns 20.2% of its operating locations; the remaining locations are leased premises. Initial terms are typically 20 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. The commencement date of all lease terms is the earlier of the date the Company becomes legally obligated to make rent payments or the date the Company has the right to control the property. The Company recognizes rent expense on a straight-line basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales. Minimum rental commitments at August 31, 2013, under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in millions): Capital Lease Operating Lease 2014 $ 1 $ 2.536 2015 19 2.514 2016 18 2.464 2017 17 2.389 2018 15 2,292 Later 270 23.507containing renewal options at five-year intervals, and may include rent escalation clauses. The commencement date of all lease terms is the earlier of the date th Zoom Out becomes legally obligated to make rent payments or the date the Company has the right to control the property. The Company recognizes rent expense on a str basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales. Minimum rental commitments at August 31, 2013, under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in millions): Capital Lease Operating Lease 2014 $ 19 $ 2,536 2015 19 2.514 2016 18 2.464 2017 17 2.38 2018 15 2,292 Later 270 23.507 Total minimum les $ 358 $ 35.702 The capital lease amount includes $155 million of imputed interest and executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $140 million on leases due in the future under non-cancelable subleases The Company remains secondarily liable on 26 assigned leases. The maximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041- Walgreen Co. Information from Consolidated Statements of Comprehensive Income For the Years Ended August 31, 2013 and 2012 (in millions) 2013 2012 Sales $ 72 217 $ 71,633 Net income $ 2,450 $ 2,127 Extracted from 10-K filings for Walgreen Co. 2013. Obtained from U.S. Securities and Exchange Commission. www.sec.gov. Required: a. Using the Consolidated Balance Sheets for Walgreen Co. for August 31, 2013 and 2012, prepare a common-size balance sheet. b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store? C. Analyze accounts receivable and allowance for doubtful accounts. d. What inventory method is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported. e. Assess the level of debt and risk that Walgreen has by looking only at the balance sheet. f. Estimate the dollar amount of dividends Walgreen paid in 2013. 9. Does Walgreen use off-balance sheet financing? Explain your answer. h. Evaluate the creditworthiness of Walgreen based on the balance sheet and the excerpts from the notes.Required: a. Using the Consolidated Balance Sheets for Walgreen Co. for August 31, 2013 and 2012, prepare a common-size balance sheet. b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store? c. Analyze accounts receivable and allowance for doubtful accounts. d. What inventory method is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported. e. Assess the level of debt and risk that Walgreen has by looking only at the balance sheet. f. Estimate the dollar amount of dividends Walgreen paid in 2013. g. Does Walgreen use off-balance sheet financing? Explain your answer. h. Evaluate the creditworthiness of Walgreen based on the balance sheet and the excerpts from the notes