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need all parts answerd its udated THE HOME DEPOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies Depel we, our or
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THE HOME DEPOT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies Depel" "we," "our" or "us" Canada, and Mexico Consolidenion and Fresenterian Out consolideted financial statcmients incluse transactins hove been eluminased in coesnlifation. Certais amousts in prior fiscal years have been reclusified to conform with the preventation adoperd is the curtent frical yeae Our Use of Fitimates We kave made a number of eatimates and surepecoss relating to Gir marke valae and consis primarity of money market fonds Recribables Me components of receivables, not, follow: Curd reccivables coesilu of payments doe froes financial iadautions for the setelement of dors for volume and co-op advertising rebatec. Cuvemer receivablea felate to cotdit alended of fiscel 2019 or fiscal 2018 Merchandise Inventories The substantial majority of ow merchandise imeetories are AB Fianal 2019 and fiscal 2017 inchude 32 merds. Fixcal 2018 includes 53 werels THE HOME DEFOT, INC. Conselidated Statements of Comprehenshe Income REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors The Home Depot, inc: Opinion on Internal Control Over Financial Reporting We have auditod The Home Depot, Inc, and Subsidiaries' (the Coenpany) internal control over finascial reporting as of February 2, 2020, based on criteria established in Internal ControlIntegruted Frumework (2013) issued by the Commitiee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal coetrol over financial reporting as of February 2, 2020, based on criteria established in Internal Control - Integrated Framework (20/3) issued by the Committee of Spoesoring Organizations of the Treadway Commission. We also have andited, in aceordance with the standards of the Poblic Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of the Company as of February 2, 2020 and Fobruary 3, 2019, the related Consolidated Statements of Earnings, Comprehensive Income, \$lockholders' Equity, and Cash Fows for each of the fiscal years in the three-year period ended February 2, 2020, and the related notes (collectively, the Consolidated Financial Statements), and our report dated March 25, 2020 expressed an unqualified opinion os those Consolidated Financial Statements. Basis for Opinion The Company's management is responsible for maintaining effective internal costrol over financial reporting and for its assessment of the effectiveness of interaal control over financial reporting, included in the accompanying Management's Report os Internal Control Over Financial Reporting. Our respossibtity is to express an opinion on the Company's internal control over finaseial reporting based oo our aodit. We are a public accounting firm regivered. With the PCAOS and are required to be independent with respect to the Company in accor: dance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commisiot and the PCAOB. We condacted our audit in accordance with the standards of the PCAOB. Those sandards require that we plan and perform the aodit to obtain reasoeable assurance about whether effective internal costrol over fisancial reporting was maistained in all material reipects. Our aodit of internal control over financial reporting ineluded obtaining an understandiag of isternal control ower financial reportiog, ansessing the risk that a material weakaess exists, and testing and evaluating the design and operating effectiveneis of isternal control based on the asiessed risk. Our audit also included performing such other procedares as we considered necessary in the circumstanses. We believe that our audit provides a reasonable basts for our opinion Definition and Limitations of Internal Control Over Financial Reporting A company's internal controt over financial reporting is a process devigned to provide reason- Merchandise Inrentories The subatantial majority of our merchandive imventeries ase. itated as the lower of cont (fins-in, fint-out) or macket, at determined by the retail invenory method, whach is based on a number of factors woch as markups, murkdowow, and inventory lonses (or shinik). As the imventery retail value is adjasted tegularly toreflect marketconditions. imentory valoed uting the retal method approsimates the fower of cont of minket Certais. ubsidianies, inclading retail operations in Canada and Merico, and distribution centers, record merchandne inetiotics at the lower of cout of net realirable value, as determinod by a cost method. These merchandice itwentories ropresent appruximately 29% of the total merchandive itrentaries balance. We evaluale the iaventory valued using a cont method at the ced of each quarter to ensure that it in carried at the lower of cost or net realizable value. The valuabon allowance for menchandive inventeries valved under a cont method was not material to our consolidated financial staterneats at the end of fiveal 2019 or fiscal 2018 . Source The Hone Depar Fom bo-K Independent physical imventory couats of cycle counts are taken on a re pular basis is each sore and distributios cester to esosure that amounts reflested is merchandise inventories are properly stated. Shrisk (er in the case of eteess isventory, swell) is the differesce between the reconded amouns of inveatiogy and the physical invertery. We calculate shrink based en actual inventory losses occurring as a pesult of physical imveatory counts faring each fiscal period and estimated investory losses oscurring between physical imvestory coents The estimate for shrink occurriag in the interim period between physical inventory cousts is calculated en a store-specifie basis based en recent shrink resilts and current trets in the business Property and Equipment Buildings, furniture, fixtures, and equipment ase recorded at cost and depretiated wing the straight-line method over their estimased tasefal lives. Leasehold impeovements se anscrtized using the straighs-lise method over the otiginal term of the lease o the useful life of the inpeovemeet, whichever is shorter. The estimated useful lives of our property and equipmeat fotlow We capitulize certain costs, including interest, relased to contruction in progress and the acguisition and development of software. Costs aveciated with the acquisition and develop- mer noas bespt, ine Teitarion fret huand im tincurmentivet Conge in nativatin an Captal enpendiares Oter invision aviale: Conswind. Ober firancisy wiven: REPORT OF INDEPENDENT REGISTERED PUBUIC ACCOUNTING FIRM To the Slockholden and Hipuri ad Dinckin The Hoche Depot, Ire. Opinion on the Consolidated Financial Statements Cash Fivas for eadt of the fiscal years in the thuee year period ended finfruary 2, 2020, and the related noter (collectively, the Coneiolidabod Financial Statements) in our opinion, the Wi alwo have autited. in actordares with the standardi of the Public Company finacial itpoeting Change in Accounting Principle its thethod of accounting for leaves as of Fvtruary 4, 2019 doe to the adopocos of Accouning Baris for Opinian These Censoludated Finakcial Suatements are tos responsibihty of the Buhange Coentivion and the 1 CAOB 94 iechuded in net sales Vendor Allowancen Weder allowances primarily oonus of volsene retuies that an earsed an a mult of anainiog certain parchaie levely and co-og adverteing allowasces for We capotalive certain couts, including interest, related to construction in progress and the acquisition and developenent of software. Costs associated with the scquistion and development of software are amoetized using the straight-line method over the estimated useful life of the software, whach is three to six years. Certain development costs nos meeting the criteria for capitalization are expensed as incurted. We evaluate our long-lived assets each quarier for indicaton of potential impairment. Indicaton of impairment include current period losses coenbined with a history of losses, our decisioa to relocate or close a store or other location before the end of its previonaly estimated uveful life, of when changes in other circumstances indicate the carrying amount of as asset may sot be rocoverable. The evaluation for losg-lived assets is performed at the lowest leve? of ideatifiable cash flows, which is generally the individual store level. The assets of a store with indicators of imparment are evaluated for receverability by comparing ats undiscounted future cash flows with its carryieg value. If the carryisg value is greater than the undiscounted future cash flows, we then measure the asset's fair value to determine wbether an impairment loss should be recognired. If the resaltiog fair valoe is less than the carrying value, an impair. meat loss is recogniged for the difference between the carrying value and the estimated fair valae. Impairment lowes co property and equipenent are recoeded as a compones of SCAA Whes a leaved lacation closes, we also incognize, is SGAA, the net present value of future Inase obligasions less evimated sublease inceme. Impairsents and lease obligation costs on closings and relocatioes were not material wo our consolidased financial satements in fiseal 2019 , fiveal 2018 , of fiscal 2017. Leases Oa February 4, 2019, we adoped the new leases sundard uing the modified retrospective transition method. Sce "Recently Adopted Accounting Pronouscements- ASU No. 201602 in the complete Form 10K for more information. Goodwill Goodwill regreieats the excess of purchase price over the fair valuo of net assets asquired. We do not amortine goodwill, but assess the recoverability of goodwill in the third guarter of each fiscal year, or mote ofies if indicatons warrant, by determining whether the fair value of each reporting snit supports its carrying value. Other Intangible Assets We amorine the cost of other finite-lived intangible ausets over their estimated useful lives, which range up to 12 years. Intangible assets with indefinite lives are tested in the thind quarter of each fiscal year for impairmen, of mose ofien if indicators The Herine Depot Form 10K warrant. Intangible assets other than goodwill are included in other assets. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a prosess designed to provide resionable assurance regardieg the reliability of financial repoeting and the preparation of finascial tatements for external porposes in accordance with generally accepted accounting principles. A company's intemal control over financial exporting includes those poticies and procedures that (1) pertain to the matintenance of reconds that, in ressonable detail, accurately and fairly reflect the trassactices and dispositions of the assets of the company. (2) provide reasonable assuranse that tratisasticns are recorded as necesuary to permit proparatioo of financial stals: ments in accordance with U.S. generally accepted accounting principies, and that receigts and expenditures of the company are being made only in aceordance with authorizations of Sovice The Home Depol Foim tox management and ditectos of the company; and (3) provide reasconable assurance regarding pervention or timsely detectioe of unasthorized acquisition, use, or disposition of the company's assets that could have at material effect on the financial statements. Becauve of its inherent limitations, internal costrol over financial reporting may not prevent of detect missatemeats, Also, proyectioes of any evaluation of effectivesess to future periods are subject to the risk that controls may beconse inadequate becasse of changes in conditions, of that the de gree of compliance wish the policies of procedures may deleriorate. W.PMG . Atlanta, Geotgia Murch 25, 2020 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Bnard of Diroctors The Home Depot, Inc: performing procedares that respond to those risks. Soch procedures ilchided examinitg, on a leat basis, evidence tegarding the amounts and disclosores in the Consolidated Financial Stanements: Our audies al so included evaluatiag the accounting principles used and signif: cant estienates made by management, as well as evaluatiog the overall presentation of the Consobdued Financial Statements. We believe that our audits provide a reasonable batis for sur opinios Critical Audit Matters The sritical audit matien communicuted below are maters arising from the current period aodit of the Conwobdated Financial Statements that were commusicated of required to be communicoted to the audit commilice and that: (1) relate to accounts of disclosures that are material to the Consolidated Financial Statements and (2) involved our cespecially challenging, subjective, or complex judgments. The coenmutication of critical sadit matten does nox alier in acy way our opinion on the Consolidated Financial Stanements, taken as a whole, and we are nok, by commanicating the critecal audit matten below, providieg separate opinions on the critical audit maters or on the accounts of disclosures to which they relate. Evaluation of the Self-Insurance Liability As discussed in Nose 1 to the Conotidated Finasial Stasemens, the Company is self-insured foe certain lowes related to peneral liability (including product liability), worker' compeosabon, employee groap medical, and automobile claimi. The Company recognises the expected ultimate cost for claims incurred at the balance sheet date as a liability. The expected ultimate cost for claims incurred is estimated based spon an analysis of historical data and actoarial estimates detecmined by the Conipany's thind party actuary. We identified the evaluation of certain self-insurance liablities as a critical audit matter. specifically those liatilities related to general liability (iscludieg product liability) and woeken' compenution. Specialiod sills were required to evaluate the actasial methods and assumptoas esed in determining certain self-insurasce liabilities. Toere was a high degree of judgment required to evaluate the Company's key aswomptoss such as loss developmest factoen and the selection of ultimate losses among etimates derived using the various actuarial methods The primary procedares we performed to address this criveal aodit matter included the followise. We tested certain inlernal controls over the Company's self-insurance liabslities process including controls ower the review of the thard-parisy actuarial report and the actuanial methods and ley auumptions used by the actuary in determiaing certais self. insurance liabilities. We analyzed the key asumptions underlying the actaaral estimates by evaluating the reported claims and claims payments. We involved actoarial professionals with ipecial. ired skills and bowledge, wbo assisted in - Awessing the actaarial methode used by the Coopany's third-party actuary, for consistency with generally accepted actuarial uandards and practices; - Evaluating the key asumptions by compuring to hiuorical data, and - Developing an independent actuarial range of certain self-insarance liablities, hased on the Company's underlying hisorieal paid and incurred losi deta, and comparing the raseg to the Company's estimated liabilities. Debt We record any premiums of discounts associated with an itvaance of long-term debt as a direct addition or deduction to the carrying value of the related senice notes. We also recoed debt issuance costs associafed with an issuance of long-term debe as a ditect deduction to the carrying value of the related veojoe notes. Premium, discount, and debt issuance costs are amortirnd over the term of the revpective notes using the effective interest rase method. Insurance We are self-insured for certain lonses relased to general liability (including product lability), worker' compensation, employee group medical, and automobile claims. We recognize the expected ultimate cost for claims incurred (undiscounsed) at the balance theet dase as a liabiliny. The expected ultimate cost for claims incurred is estimated based upon analyus of historical data and actuarial estimates. Our self-insurznce liabilities, which are included in accrued salaries and related expenses, otber accrued expenves and other long termi liabilities in the consolidated balance sheets, were $1.3 billice at February 2, 2020 and February 3, 2019. We also maintain network security asd privacy liahility insurance coverege to liast cur exposure to losses sach as those that may be casused by a significant comptomise or beeach of our data security. Insurance-related expenses are included in SGEA Treasury Stock Treasury stock is reflected as a reduction of stockholden' equity at cost Wo use the weighted-average purchase cost to determine the cost of treasury stock that is reissued, if amy Net Sales On Jantary 29,2018 , we adopted the new revenve recogniben guidance pet ASU No, 2014-09 uning the modified retrospective transition method, which requires that we recognixe revenue differently pre- and post-adoption. Fical 2018 and Sabseqwent Friods. We recognize sevenue, net of expected returns and sales ax, at the time the customer takes possession of merchandise or when a service is perforaied. The liability for sales returns, including the impact to grovi profit, is estimated based on historical return levels and recognized af the tansactioe price. We also recognize a returt ssset, and corresponding adjustment to cost of sales, for our right to recover the goods returned by the cusiomer, measured at the former carrying amount of the goods, less any expected recovery cost. At each finuncial reporting date, we assess our estimates of expected retarns, refund liabilities, aod return assets. Net sales inclede services revenue generated through a variety of installation, home mainteaance, and professional service programs. In these programs, the customer selects and purchases material for a project, and we provide or arrange for professional installation. These programs are offered through our stoeres, online, and in home sales programs. Under certain programs, when we provide or arrange for the installation of a project and the subcontractor provides material as part of the intallasion, both the material and labor are included in services revenue. We recogaize this revenue when the service for the custoener is complete, which is pot materially different from recognizing the revenue over the service period as the substantial majority of our services are completed within one week. For product sold in stores or online, payment is typically due at the point of sale. For services, puyment in full is doe upon completion of the job. When we receive payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is reconded as deferred revenue untal the sale of service is complete. Soch performance obligatioos are part of contracts with expected original dura- We idkntified the evaluation of the Company's gross unrecognized tax benefits as a critj. cal audit matter. Coenplec auditor judgmeat was required to evaloate the Company's interprotation of tax law and its identification and determination of the ulimate revolution of its lax positions. The primaty peocedures we performed to address this critical aodit matter included the following. We iested certain isternal cootrols over the Coinpany's tax process to evalo. ate pross unrecognined tax benefits, including controls related to (i) interpreting tas law, (2) evaluating which of the Company's tax postions may not be sustained upen cxamination, and (3) determittation of the more-likely-than not amount of the positions is be upheld We involved tax professionals wibls specialized sklils and knowledge, who assisted in: - Assesung the transfer pricing studies for compliance with applicable laws and regolations; - Evaluatiag the Company's interpretation of us laws by developing an independent aseusment based on our uoderitanding asd interpetation of the tax laws - Invecting seitlements with applicable taxing authorities, and cvaluating the expiration of utatutes of linsitations; and - Analyziag the Company's assamptoons and data used to determine the amoont of tas beocfits to recognize as well as fosting the Company's calculations and companng the resulis to the Company's astessment h/ KPMCH. H. We have served as the Company's auditor since 1979. Alanta, Cecegia Marca 25, 2020 fieancial reporting patpones, we not clipble bs be included in onar cotroblated US. foJ. incognived See Nove 5 lor further Anowaion. Ooher notes to the financial statements can be dowablosded from sec gov ear the inveaser relations secticen of the comparys webite Censellinted Balnes Shets in millions, encept por share doua ASSETS Currentaucts: Cach and canh equivalens: Receivables, net Menchandise inventories Other current assets Total carrent assets Net properity and equipment Operating leave right-of-use assets Gooswill Other assets Total assets I.IABILITIES AND STOCKHOLDERS' RQUTY Current lisbilities. Sbort-kerma debt Accoants payable Accrued valaries ind related expenses Sales taves payable Deficrrod revenue Incoene taxes payable Current instaliments of long-term debt Carfent operating lease liabilities Other accroed expenses Total current liabilities Long-teren debt, excluding current installnests Long-term operating lease liabilities Deferred incoenc taxes Other long-term liabilities Total liabilities Common stock, par value $0.05; authorined: 10,000 shares; isued: 1,786 shares at February 2,2020 and 1,782 shares at February 3.2019, cutstanding: 1,077 shares at February 2, 2020 and 1,105 shares at February 3,2019 Paid-in capital Retained camings Accumulated other coenpechensive loss Treasury stock, at cos, 709 shares at February 2,2020 and 677 shares at Febeuary 3, 2019 Total stockholder's' (deficit) equity Tocal liabilites and sockholders' equity February 2, 2020 "Fiscal 201\%" 52,133 2,106 14,531 1,040 22,77019,810 5,595 2,254 551,236807 5 974 7,787 1,494 605 2,116 55 1,539 28 18,3752,677 5,0066 706 54,3521,5,35 February 3,2019 "Fiseal 2018 " Refer to the financial statements of The Home Depot in Appendx A. (Note: Fiscal 2019 for The Home Depot funs from Febrisary 4 , 2019 , to February 2, 2020. As with many retail companies, The. Home Depot labels the period "Fiscal 2019 even though it ends in the 2020 calendar year. The label "Fiscal 2019 " is appropriate because Fiscal 2019 includes 11 manths from the 2019 calendar year, The Home Depot explains its choice of fiscal period in Note 1 to its financial statements) Required: 1. What were the year-end dates for the "Fiscal 2019 and "Fiscal 2018 " periods? Option A Option B Option C Option D 2. Which of the following are the amounts in the company's accounting equation (A=L+SE ) for the 2019 fiscal year end? $51,236=$54,352+$(3,116)$54,352=$51,236+3,$16$110,225=$72,653+$37,372$14,715=$3,473+$11,242 3. What is vie company's current tatio at February 2, 2020? 108 0.34 0.39 107 4. What does the company's current ratio in requirement 3 indicate? The compang has more than one dolar of current assets for every dollor of current liabities due in the next yeac The company has iess than one dollar of curent swots for every dollar of current liabitties due in the next year. Less than hat of the companys assets are current. Less then hat of the company's liabities are current Step by Step Solution
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