Comprehensive Ratio Analysis Project Home Depot, Inc. ANALYSIS OF THE FINANCIAL STATEMENTS OF A PUBLICLY OWNED CORPORATION This Comprehensive Problem is to acquaint you with the content of the 2012 financial statements of Home Depot, Inc. The 2012 annual report (SEC 10-K) is provided as a pdf document. (The 2012 financial statements are for the fiscal year ended February 3, 2013.) This 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 II involves analysis of the company's liquidity; and Part III analyzes the trend in its profitability. 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 statements. The first note accompanying the financial statements provides a brief description of the major accounting policies the company used. Part I 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. 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? Where are all of these statements audited? Name the auditors. What were the auditors conclusions concerning these statements? (10 points) b. Home Depot, Inc., combines its statement of retained earnings with another financial, statement. Where are details about changes in the amount of retained earnings found? (10 points) c. 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? (10 points)6 Document View Part II Assume that you are the credit manager of a medium-size supplier of building materials and related products. Home Depot, Inc., wants to make credit purchases from your company. with payment due in 60 days. Instructions a. As general background, read the rst note to the nancial statements. "Summary of Signicant Accounting Policies." Next. compute the following for the scal years ending February 3, 2013, and January 29, 2012 [provide the detail of your calculations and round percentages to the nearest tenth of 1 percent, and other computations to one decimal place): tiQmietsl 1. Current ratio. 2. Quick ratio. 3. Amount of working capital. 4. Percentage change in working capital from the prior year. 5. Percentage change in cash and cash equivalents from the prior year. b. On the basis of your analysis in part a, does the company's liquidity appear to have increased or decreased during the most recent scal year? Explain. [10 mints! c. Other than the ability of Home Depot, Inc. to pay for its purchases, do you see any major considerations that should enter into your company's decision? Explain. [10 points! d. Your company assigns each customer one of the four credit ratings listed below. Assign a credit rating to Home Depot, Inc., and write a memorandum explaining your decision. (In your memorandum, you may refer to any of your computations or observations in parts a through c, and to any information contained in the annual report.) 120 Qintsl POSSIBLE CREDIT RATINGS A Outstanding Little or no risk of inability to pay. For customers in this category, we ll 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 A5 general background, study the "Five-Year Summary of Financial and Operating Results." Instructions a. Compute the following for the scal years ending February 3, 2013, and January 29. 2012 (provide the detail of your calculations and round percentages to the nearest tenth of 1 percent): 160 lElms! Percentage change in net sales (relative to the prior year). Percentage change in net earnings. Gross prot rate. Net income as a percentage of sales. Return on average total assets. Return on average total equity. P'F'PrSJN!' b. Write a statement that describes your conclusion(s) concerning trends in Home Depot, Inc.'s protability during the period covered in your analysis in part a above. Justify your conclusions(sl. 120 mints! Ill 0 <