THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (1) Fiscal years ended January 31, 2016, February 1, 2015 and February 2, 2014 include 52 weeks. See accompanying Notes to Consolidated Financial Statements. THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Year Ended" (1) Fiscal years ended January 31, 2016, February 1, 2015 and February 2, 2014 include 52 weeks. See accompanying Notes to Consolidated Financial Statements. A-6 THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS \begin{tabular}{|c|c|c|c|c|} \hline amounts in millions, except share and per share data & Jan & \begin{tabular}{l} Iary 31 , \\ 2016 \end{tabular} & & \begin{tabular}{l} uary 1 , \\ 015 \end{tabular} \\ \hline \multicolumn{5}{|l|}{ ASSETS } \\ \hline \multicolumn{5}{|l|}{ Current Assets: } \\ \hline Cash and Cash Equivalents & $ & 2,216 & $ & 1,723 \\ \hline Receivables, net & & 1,890 & & 1,484 \\ \hline Merchandise Inventories & & 11,809 & & 11,079 \\ \hline Other Current Assets & & 1,078 & & 1,016 \\ \hline Total Current Assets & & 16,993 & & 15,302 \\ \hline Property and Equipment, at cost & & 39,266 & & 38,513 \\ \hline Less Accumulated Depreciation and Amortization & & 17,075 & & 15,793 \\ \hline Net Property and Equipment & & 22,191 & & 22,720 \\ \hline Goodwill & & 2,102 & & 1,353 \\ \hline Other Assets & & 1,263 & & 571 \\ \hline Total Assets & $ & 42,549 & $ & 39,946 \\ \hline \multicolumn{5}{|l|}{ LIABILITIES AND STOCKHOLDERS' EQUITY } \\ \hline \multicolumn{5}{|l|}{ Current Liabilities: } \\ \hline Short-Term Debt & $ & 350 & $ & 290 \\ \hline Accounts Payable & & 6,565 & & 5,807 \\ \hline Accrued Salaries and Related Expenses & & 1,515 & & 1,391 \\ \hline Sales Taxes Payable & & 476 & & 434 \\ \hline Deferred Revenue & & 1,566 & & 1,468 \\ \hline Income Taxes Payable & & 34 & & 35 \\ \hline Current Installments of Long-Term Debt & & 77 & & 38 \\ \hline Other Accrued Expenses & & 1,943 & & 1,806 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|} \hline Total Current Liabilities & 12,526 & 11,269 \\ \hline Long-Term Debt, excluding current installments & 20,888 & 16,869 \\ \hline Other Long-Term Liabilities & 1,965 & 1,844 \\ \hline Deferred Income Taxes & 854 & 642 \\ \hline Total Liabilities & 36,233 & 30,624 \\ \hline \multicolumn{3}{|l|}{ STOCKHOLDERS' EQUITY } \\ \hline \multicolumn{3}{|l|}{\begin{tabular}{l} Common Stock, par value $0.05; authorized: 10 billion shares; issued: \\ 1.772 billion shares at \\ January 31,2016 and 1.768 billion shares at February 1,2015 ; \\ outstanding: 1.252 billion \\ shares at January 31,2016 and 1.307 billion shares at February 1,2015 \end{tabular}} \\ \hline Paid-In Capital & 9,347 & 8,885 \\ \hline Retained Earnings & 30,973 & 26,995 \\ \hline Accumulated Other Comprehensive Loss & (898) & (452) \\ \hline \begin{tabular}{l} Treasury Stock, at cost, 520 million shares at January 31, 2016 and 461 \\ million shares at February 1, 2015 \end{tabular} & (33,194) & (26,194) \\ \hline Total Stockholders' Equity & 6,316 & 9,322 \\ \hline Total Liabilities and Stockholders' Equity & $42,549 & $39,946 \\ \hline \end{tabular} See accompanying Notes to Consolidated Financial Statements. THE HOME DEPOT, INC. AND SUBSIDIARIES See accompanying Notes to Consolldated Financial Statements. THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended (1) Fiscal years ended January 31, 2016, February 1, 2015 and February 2, 2014 include 52 weeks. See accompanying Notes to Consolidated Financial Statements. A-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business, Consolidation and Presentation The Home Depot, Inc., together with its subsidiaries (the "Company"), is a home improvement retailer that sells a wide assortment of building materials, home improvement products and lawn and garden products and provides a number of services. The Home Depot stores, which are full-service, warehouse-style stores averaging approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area, stock approximately 30,000 to 40,000 different kinds of products that are sold to do-it-yourself customers, do-it-for-me customers and professional customers. The Company also offers a significantly broader product assortment through its Home Depot, Home Decorators Collection and Blinds.com websites. At the end of fiscal 2015, the Company was operating 2,274 The Home Depot stores, which included 1,977 stores in the United States, including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam ("U.S."), 182 stores in Canada and 115 stores in Mexico. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Fiscal Year The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years ended January 31, 2016 ("fiscal 2015"), February 1, 2015 ("fiscal 2014") and February 2, 2014 ("fiscal 2013") include 52 weeks. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from these estimates. Fair Value of Financial Instruments The carrying amounts of Cash and Cash Equivalents, Receivables, Short-Term Debt and Accounts Payable approximate fair value due to the short-term maturities of these financial instruments. The fair value of the Company's Long-Term Debt is discussed in Note 11. Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company's cash equivalents are carried at fair market value and consist primarily of money market funds. Accounts Receivable The Company has an agreement with a third-party service provider who directly extends credit to customers, manages the Company's private label credit card program and owns the related receivables. The Company evaluated the third-party entities holding the receivables under the program and concluded that they should not be consolidated by the Company. The agreement with the third-party service provider expires in January 2018, with the Company having the option, but no obligation, to purchase the receivables at the end of the agreement. The deferred interest charges incurred by the Company for its deferred financing programs offered to its customers are included in Cost of Sales. The interchange fees charged to the Company for the customers' use of the cards and any profit sharing with the third-party service provider are included in Selling, General and Administrative expenses ("SG\&A"). The sum of the three is referred to by the Company as "the cost of credit" of the private label credit card program. In addition, certain subsidiaries of the Company, including Interline Brands, Inc. ("Interline"), extend credit directly to customers in the ordinary course of business. The receivables due from customers were \$253 million and \$68 million as of January 31, 2016 and February 1, 2015, respectively. The Company's valuation reserve related to accounts receivable was not material to the Consolidated Financial Statements of the Company as of the end of fiscal 2015 or 2014. Merchandise Inventories The majority of the Company's Merchandise Inventories are stated at the lower of cost (first-in, firstout) or market, as determined by the retail inventory method. As the inventory retail value is adjusted regularly to reflect market conditions, the inventory valued using the retail method approximates the lower of cost or market. Certain subsidiaries, including retail operations in Canada and Mexico, distribution centers and Interline, record Merchandise Inventories at the lower of cost or market, as Depreciation and Amortization The Company's Buildings, Furniture, Fixtures and Equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter. The Company's Property and Equipment is depreciated using the following estimated useful lives: Capitalized Software Costs The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software, which is three to six years. Certain development costs not meeting the criteria for capitalization are expensed as incurred. Revenues The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services. The liability for sales returns is estimated based on historical return levels. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete. The Company also records Deferred Revenue for the sale of gift cards and recognizes this revenue upon the redemption of gift cards in Net Sales. Gift card breakage income is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. During fiscal 2015 , 2014 and 2013, the Company recognized \$27 million, \$32 million and \$30 million, respectively, of gift card breakage income. This income is included in the accompanying Consolidated Statements of Earnings as a reduction in SG\&A. Services Revenue Net Sales include services revenue generated through a variety of installation, home maintenance and professional service programs. In these programs, the customer selects and purchases material for a project, and the Company provides or arranges professional installation. These programs are offered through the Company's stores and in-home sales programs. Under certain programs, when the Company provides or arranges the installation of a project and the subcontractor provides material as part of the installation, both the material and labor are included in services revenue. The Company recognizes this revenue when the service for the customer is complete. Stock-Based Compensation The per share weighted average fair value of stock options granted during fiscal 2015, 2014 and 2013 was $18.54,$14.13 and $13.10, respectively. The fair value of these options was determined at the date of grant using the Black-Scholes option-pricing model with the following assumptions: Derivatives The Company uses derivative financial instruments from time to time in the management of its interest rate exposure on long-term debt and its exposure on foreign currency fluctuations. The Company accounts for its derivative financial instruments in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Subtopic 815-10. The fair value of the Company's derivative financial instruments is discussed in Note 11. The following table presents the Net Sales of each major product category (and related services) for each of the last three fiscal years (dollar amounts in millions): Part I Assume that you are the credit manager of a medium-size supplier of building materials and related products. Home Depot wants to make credit purchases from your company, with payment due in 60 days. Instructions a. As general background, read the first note to the financial statements, "Summary of Significant Accounting Policies." Next, compute the following for the fiscal years ending January 31, 2016, and February 1, 2015 (round percentages to the nearest tenth of 1 percent, and other computations to one decimal place). 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 fiscal year? Explain. c. Other than the ability of Home Depot to pay for its purchases, do you see any major considerations that should enter into your company's decision? Explain. d. Your company assigns each customer one of the four credit ratings listed below. Assign a credit rating to Home Depot, Inc., and explain your decision. POSSIBLE CREDIT RATINGS A. Outstanding Little or no risk of inability to pay. For customers in this category, we fill 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 II Instructions a. Compute the following for the fiscal years ending January 31,2016 , and February 1 , 2015 (round percentages to the nearest tenth of 1 percent): 1. Percentage change in net sales (relative to the prior year). 2. Percentage change in net earnings. 3. Gross profit rate. 4. Net income as a percentage of sales. 5. Return on average total assets. 6. Return on average total equity. b. Write a statement that describes your conclusion(s) concerning trends in Home Depot's profitability during the period covered in your analysis in part a above. Justify your conclusion(s)