Exhibits 1.26, 1.27 and 1.28 of Integrative Case 1.1 (Chapter 1) present the financial statements for Walmart for 20122015. In addition, the website for this text contains Walmarts December 31, 2015, Form 10-K. You should read the management discussion and analysis (MD&A), financial statements, and notes to the financial statements, especially Note 2, Summary of Significant Accounting Policies. Operations create working capital accounts.

Required: Working Capital

• f.

  Operations create working capital accounts. Which of Walmarts working capital accounts are the most financially significant?

• g.

  Does Walmarts working capital management yield a positive or negative net investment in working capital? Is this a good situation for Walmarts profitability? Why?

Required: Income Taxes

• h.

  Note 9 to Walmarts consolidated financial statements presents a substantial amount of income taxrelated information, including an effective income tax rate reconciliation. Which reconciling items appear to be relatively persistent?

• i.

  What is the effect of Walmarts generation of income in foreign jurisdictions on the effective tax rate? Is the effect changing over time?

• j.

  Are Walmarts foreign earnings growing relative to U.S. earnings?

• k.

  What is the interpretation of the line item Net impact of repatriated international earnings? Why is it a positive reconciling item in some years but negative in other years?

11/9/2020 Print Preview For the Fiscal Year Ended May 31: 2014 2015 2016 Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Operating Income Interest (expense) income, net Other income lexpensel.net Income before income taxes Income tax expense NET INCOME Earnings per common share: Basic Diluted Dividends declared per common share $ 27,799 15,353 $12,446 3,031 5,735 $ 3.680 (33) (103) $ 3.544 851 $ 2,693 $ 30,601 16.534 $14,067 3.213 6.679 5.4.175 128) 58 $ 4,205 932 5 3.273 532376 17405 $14.971 3.278 7.191 $ 4,502 (19) 140 5 4.623 863 $ 3.760 $1.52 $ 1.49 $ 0.47 5 1.90 5 1.85 $ 0.54 5 221 5 2.16 5 0.62 Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016. Exhibit 1.26 Consolidated Statements of Cash Flows for Nike (amounts in millions) (Case 1.2) For the Fiscal Years Ended May 31: 2014 2015 2016 $ 2,693 $ 3,273 $ 3.760 518 (11) 177 68 56 606 (113) 191 43 424 649 (80) 236 13 98 Cash provided by operations: Net income Income changes tcredits) not affecting cash Depreciation Deferred income taxes Stock based compensation Amortization and other Net foreign currency adjustments Changes in certain working capital components and other assets and liabilities: Decrease increase in accounts receivable Increase in inventories Increase in prepaid expenses and other current assets (Decrease increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Investments in reverse repurchase agreements Additions to property, plant, and equipment Disposals of property, plant, and equipment Decrease increase) in other assets, net of other liabilities Cash used by investing activities (298) 1505) (210) (216) (621) (144) 60 (590) (161) 525 $3.013 1.237 $ 4.680 (889) $ 3,096 (5,386) 3.932 1.126 (4,936) 3,655 2.216 (150) 1963) 3 18801 (5,367) 2.924 2,386 150 (1.143) 10 6 S[1,034) (2) 501.207 $ (175 (60) 75 (17) 163) (19) 981 (106) (67) 17) 383 514 507 Cash used by financing activities: Net proceeds from long-term debt issuance Long term debt payments, including current portion (Decrease increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchases of common stock Dividends common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net (decrease increase in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year 132 281 (2.626) 2993 52,914 191 $61,117 $ 3.337 $ 2,220 218 (2.534) 1899) $12.790) 183) $ 1,632 $ 2,220 5 3,852 (3.238) (1.022) $12.671) 10S $ 1714 $ 3.852 52.138 Source: Inc., Form 10-K for the Fiscal Year ended May 31, 2016 Exhibit 1.27 Excerpts from Notes to Consolidated Financial Statements for Nike (amounts in millions) (Case 1.2) Revenue Recognition: Nike recognizes wholesale revenues when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post- invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Allowance for Uncollectible Accounts Receivable: Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. The allowance for uncollectible accounts receivable was $43 million and $78 million at May 31, 2016 and 2015, respectively Demand Creation Expense: Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Inventory Valuation: Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. Property. Plant and Equipment and Depreciation Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. Print Preview Identifiable intangible Assets and Goodwill: This account represents the excess of the purchase price of acquired businesses over the market values of identifiable net assets, net of amortization to date on assets with limited lives. Income Taxes: The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Income tax expense includes the following: (amounts in millions) 2014 2015 2016 Currently Payable Deferred Income Tax Expense $862 (11) $851 $1,045 (113) $932 $943 (80) $863 Stock Repurchases: Nike repurchases outstanding shares of its common stock each year and retires them. Any difference between the price paid and the book value of the shares appears as an adjustment of retained earnings. Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016 Exhibit 1.28 Common-Size and Percentage Change Income Statements for Nike (Case 1.2) For the Facal Year Ended May 31: Common Size: 2015 Percentage Change 2015 2016 2014 2016 5.8% 5.3% 6.4% 2.0% Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Operating Income Interest expensel income net Other income lexpemel, net Income before income taxes Income tax expense NET INCOME 100.0 (55.2 44.0 10.9) (20.6 13.2% (0.19 10.4) 12.7% (3.15) 9.7 100.00 154.04 46.09 (105) 21.04 13.6% 0.1 0.24 13.79 (30 102 100.0% 153.89 46.296 (10.14) (22.2) 13.9 (0.156) OAN 143 10.15 7.79 13.0% 6.0% 16.5 13.596 115.29.3 (1563) 18.79 9.5% 21.54 7.89 02.19) 141.4 9.99 11.0 14. Exhibit 1.29 Common Size and 11/9/2020 Print Preview For the Fiscal Year Ended May 31: 2014 2015 2016 Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Operating Income Interest (expense) income, net Other income lexpensel.net Income before income taxes Income tax expense NET INCOME Earnings per common share: Basic Diluted Dividends declared per common share $ 27,799 15,353 $12,446 3,031 5,735 $ 3.680 (33) (103) $ 3.544 851 $ 2,693 $ 30,601 16.534 $14,067 3.213 6.679 5.4.175 128) 58 $ 4,205 932 5 3.273 532376 17405 $14.971 3.278 7.191 $ 4,502 (19) 140 5 4.623 863 $ 3.760 $1.52 $ 1.49 $ 0.47 5 1.90 5 1.85 $ 0.54 5 221 5 2.16 5 0.62 Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016. Exhibit 1.26 Consolidated Statements of Cash Flows for Nike (amounts in millions) (Case 1.2) For the Fiscal Years Ended May 31: 2014 2015 2016 $ 2,693 $ 3,273 $ 3.760 518 (11) 177 68 56 606 (113) 191 43 424 649 (80) 236 13 98 Cash provided by operations: Net income Income changes tcredits) not affecting cash Depreciation Deferred income taxes Stock based compensation Amortization and other Net foreign currency adjustments Changes in certain working capital components and other assets and liabilities: Decrease increase in accounts receivable Increase in inventories Increase in prepaid expenses and other current assets (Decrease increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Investments in reverse repurchase agreements Additions to property, plant, and equipment Disposals of property, plant, and equipment Decrease increase) in other assets, net of other liabilities Cash used by investing activities (298) 1505) (210) (216) (621) (144) 60 (590) (161) 525 $3.013 1.237 $ 4.680 (889) $ 3,096 (5,386) 3.932 1.126 (4,936) 3,655 2.216 (150) 1963) 3 18801 (5,367) 2.924 2,386 150 (1.143) 10 6 S[1,034) (2) 501.207 $ (175 (60) 75 (17) 163) (19) 981 (106) (67) 17) 383 514 507 Cash used by financing activities: Net proceeds from long-term debt issuance Long term debt payments, including current portion (Decrease increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchases of common stock Dividends common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net (decrease increase in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year 132 281 (2.626) 2993 52,914 191 $61,117 $ 3.337 $ 2,220 218 (2.534) 1899) $12.790) 183) $ 1,632 $ 2,220 5 3,852 (3.238) (1.022) $12.671) 10S $ 1714 $ 3.852 52.138 Source: Inc., Form 10-K for the Fiscal Year ended May 31, 2016 Exhibit 1.27 Excerpts from Notes to Consolidated Financial Statements for Nike (amounts in millions) (Case 1.2) Revenue Recognition: Nike recognizes wholesale revenues when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post- invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Allowance for Uncollectible Accounts Receivable: Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. The allowance for uncollectible accounts receivable was $43 million and $78 million at May 31, 2016 and 2015, respectively Demand Creation Expense: Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation. Advertising production costs are expensed the first time an advertisement is run. Inventory Valuation: Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees. Property. Plant and Equipment and Depreciation Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years. Print Preview Identifiable intangible Assets and Goodwill: This account represents the excess of the purchase price of acquired businesses over the market values of identifiable net assets, net of amortization to date on assets with limited lives. Income Taxes: The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Income tax expense includes the following: (amounts in millions) 2014 2015 2016 Currently Payable Deferred Income Tax Expense $862 (11) $851 $1,045 (113) $932 $943 (80) $863 Stock Repurchases: Nike repurchases outstanding shares of its common stock each year and retires them. Any difference between the price paid and the book value of the shares appears as an adjustment of retained earnings. Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016 Exhibit 1.28 Common-Size and Percentage Change Income Statements for Nike (Case 1.2) For the Facal Year Ended May 31: Common Size: 2015 Percentage Change 2015 2016 2014 2016 5.8% 5.3% 6.4% 2.0% Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Operating Income Interest expensel income net Other income lexpemel, net Income before income taxes Income tax expense NET INCOME 100.0 (55.2 44.0 10.9) (20.6 13.2% (0.19 10.4) 12.7% (3.15) 9.7 100.00 154.04 46.09 (105) 21.04 13.6% 0.1 0.24 13.79 (30 102 100.0% 153.89 46.296 (10.14) (22.2) 13.9 (0.156) OAN 143 10.15 7.79 13.0% 6.0% 16.5 13.596 115.29.3 (1563) 18.79 9.5% 21.54 7.89 02.19) 141.4 9.99 11.0 14. Exhibit 1.29 Common Size and