Part 1: Financial Statement Search and Analysis

Communicating information to others is a fundamental human characteristic. Coaches use game statistics to plan strategies for future games. College graduates prepare resumes to describe their credentials to prospective employers. You might say an annual report is a resume prepared for a corporation. As you discovered during the last few weeks, much of the information in corporate annual reports is dictated by generally accepted accounting principles (GAAP). For example, GAAP requires annual reports to disclose four financial statements: a comprehensive income statement, a balance sheet, a statement of cash flows, and a statement of retained earnings, as well as a multitude of supplemental disclosures. Annual reports communicate information between corporations and financial statement users. It is important for managers and leaders to understand and be able to analyze financial reports. The purpose of this project is to apply the knowledge you have acquired to help you understand and analyze an annual report.

Open or print the 2022 Annual Report (10-K) of Kroger Company and answer the following questions. A pdf version of Krogers 10-K is uploaded to MOODLE. You can also find a copy of the annual report at sec.gov. (Go to sec.gov; Click on Filings and then Company Filing Search. Search for Kroger and select Kroger Co. On the left, you can select 10-K. Choose the annual report for the year ended January 28, 2023.) The electronic copy is tagged with XBRL (red underlines.)

	Question	Answer
1.	Note that the 10-K is split into Items and is consistent for every SEC Registrant. Item 1a discusses risks. Note that many items are discussed including COVID 19. In Item 1B, Kroger would discuss any open SEC comments. They currently have none. In Item 2, they describe Properties. Item 3 is titled Legal Proceedings. Item 4 is Mine Safety Disclosures which is not applicable for many SEC Registrants. Item 5 discusses a Registrants Stockholder Matters. Based on the information in this annual report, when did Kroger last declare a quarterly dividend? What was the amount and when will it be paid?
2.	Item 7 is a key item as it Managements Analysis (referred to as the MD&A). What was a significant event during the fiscal year?
3.	Kroger discusses their Gross Margin in the MDA. How does Kroger calculate Gross Margin? What is included in merchandise costs? Gross margin as a percentage of sales decreased in 2022. What is one reason for the decrease?
4.	Kroger discusses factors affecting liquidity in their MDA. What impacts their liquidity? What was their Leverage Ratio? What amount would result in a default?
	Item 7A: Includes managements assessment of financial risks, followed by Item 8 which includes the reports by independent auditors, US GAAP prepared financial statements, and footnotes. Report of the Independent Auditors: The purpose of the audit report is to communicate the findings of the auditor to financial statement users. The auditors report usually appears right before the financial statements or immediately after the notes to the financial statements.
5.	Who was Krogers Independent Auditors? And how long have they been the auditors?
	Item 8 includes the required financial statements and footnotes. The Balance Sheet summarizes assets and liabilities and stockholders equity of a corporation. Assets are usually grouped in one of five categories: current assets, investments, fixed assets (sometimes referred to as property, plant and equipment), intangible assets, and other assets. Liabilities are typically grouped into current liabilities and long-term liabilities.
6.	What was the % growth in total assets from 2021 to 2022?
7.	What was the current ratio for 2022? How does this compare to 2021? Did the current ratio weaken or strengthen?
8.	Compute inventory turnover for the Kroger in 2022 and 2021? What was the number of days in inventory during 2022 and 2021? Use FIFO #s for this calculation. (Hint to calculate Cost of Sales at FIFO take Cost of Sales on the Income Statement and subtract the LIFO charge for that year noted on the Statement of Cash Flow.)
9.	What is Krogers total liabilities to total assets ratio in 2022 and 2021?
10.	What is Krogers total debt to equity ratio in 2022 and 2021? What was the main reason for the change?
	Income Statement (sometimes called the Statement of Earnings or Statement of Operations) summarizes corporate revenues and expenses for a period of time. Corporations provide three years of income statements for comparative purposes.
11.	What was Krogers % change in revenue between 2022 and 2021? Does management comment on this change? You may need to see MD&A for an answer.
12.	What was Krogers % increase in Operating profit between 2022 and 2021? What was Krogers decrease in net income (net earnings) between 2022 and 2021? What was the main reason for this decrease?
13.	What was Basic EPS and Diluted EPS for 2022? What causes the difference in number of shares? (Hint: see footnote #10)
14.	All companies are required to disclose comprehensive income in a continuance income statement or separate comprehensive income statement. What did Kroger choose?
15.	What was Comprehensive income for 2022?
16	What was Other Comprehensive Income for 2022?
17.	What type of items were included in other comprehensive income?
	Statement of Cash Flows the purpose of this statement is to provide information about cash receipts, cash disbursements, and cash balances. The statement also summarizes operating, investing and financing activities of the corporation.
18.	How much did cash increase or decrease between 2022 and 2021?
19.	How much cash did Kroger generate from Operating Activities in 2022?
20.	What causes the greatest difference between net income and cash flow from operating activities?
21.	Why is Share-based employee compensation added to Net Earnings to calculate Net Cash Provided by Operating Activities?
22.	How much cash did Kroger generate or use from Investing activities in 2022? What was the largest item in this area?
23.	How much cash did Kroger generate or use from Financing activities in 2022? Did Kroger borrow more funds than they paid back? Indicate amounts borrowed and payments. How much did Kroger spend on Treasury Stock (repurchase of common stock) transactions?
24.	Does the ending cash balance on the Statement of Cash Flows agrees to Cash on the Balance Sheet? (yes or no)
	Statement of Changes in Stockholders Equity This statement explains the changes in individual equity accounts during the year. Most annual reports show the statement of changes in stockholders equity as a formal financial statement; however, some corporations show the statement of stockholders equity in the notes of the financial statements. If the retained earnings are the only capital account that changed during the fiscal year, a statement of changes in retained earnings is usually presented instead. You will find the information to answer the following questions in this statement or on the balance sheet.
25.	What is the par value per share for common stock? (See balance sheet)
26.	What is the number of common shares authorized?
27.	What is the number of common shares held in treasury?
28.	How many treasury shares were purchased from the public during 2022?
29.	What is the number of common shares issued? Did the number of common shares issued increase, decrease or remain constant.
30.	What is the number of common shares outstanding in 2022?
31.	Why (and by what amount) did Accumulated Other Comprehensive Income Change during 2022?
32.	Why (and by what amount) did retained earnings (Accumulated Earnings) change during 2022? Does the change in Retained Earnings due to net income agree with the Income Statement?
	Notes to the Financial Statements provide the needed information to fully understand the financial statements and the financial decisions made by the company.
33.	In Footnote #1, companies describe how they implement US GAAP. When does Kroger recognize revenue? Is this consistent with the Revenue Recognition Principle?
34.	How does Kroger handle gift cards? What was the balance in the deferred revenue account at January 28, 2023? What type of account is the deferred revenue account?
35.	Kroger is self-insured for certain costs. Similar to warranties, Kroger estimates the expense each year on the accrual basis and increases the self-insurance liability? How much did Kroger expense in 2022 for self-insurance compared to actual claim payments? Over the last three years, did they expense more or less than actual claims?
36.	What type of product presents the greatest sales revenue?
37.	What is the cost of all PP&E and the balance in the Accumulated Depreciation/Amortization Account at the end of 2023? (See Note 3)
38.	What % depreciated is PP&E in 2022? (Hint: Include all of PP&E except for land and Construction-in-Progress).
39.	Read Note 7 Fair Value Measurements: Is this consistent with what we discussed in class? At January 28, 2023, what % of assets using fair value was determined as Level 1, Level 2 and Level 3? How does this compare to the prior year?
40	See Note 11: How was the fair value of stock options determined? What was total stock compensation expense recognized in 2022?
41	See Note 13: Does Kroger have Preferred Stock? Has any preferred stock been issued?
42	See Note 14: What was the funded status of Krogers Qualified Defined Benefit Plan at January 28, 2023?
43	One objective of this course was to provide an overview of financial accounting. Did you understand the main concepts in the annual report? What was the most interesting thing you read in this annual report? Was there anything that surprised you?