Walmart, Target, and Costco: Probing Financial Statements

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The article basically discusses the financial statements’ analysis of three companies, Walmart, Target, and Costco; though, the main focus is laid on Walmart. In the article, one would find the discussion of the types of queries that are bolster the management of any firm to gain confidence for the revelation of the financial information. Moreover, the four stages for analyzing the financial statements are also elaborated, following the analyses of the above mentioned firms through the typical financial indicators including profitability and turnover.

First, the six kinds of questions for the management regarding the financial statements are; “recall, comprehension, application, analysis, synthesis, and evaluation”. Of these six, the last three can assist the executives to identify the quality of the financial info disclosed.

Questions relating to ‘analysis’ relates to the firm’s risk and return metrics, ‘synthesis’ relates to facts and perspectives of the firm, and ‘evaluation’ relates to the resolving of the dissimilarities of opinions the firm faces. In addition, the author states that the expectation of excellent queries can really help the company prepare the reports easily and honestly. Walmart has been selected as an example to demonstrate the overall financial statements approach; which has been performing outstandingly since 2002, and Costco and Target are used as yardsticks for the comparison.

The analysis of the financial statements is done through four stages:

– Data adjustments stage in which the measurement errors are curtailed by the use of accounting rules, knowing the off-balance sheet entries and useful or un-useful assets. Further, financing and operating activities and effects are differentiated along with the adjustments done for the capitalization of operating leases and R&D costs.
– Ratio analysis stage revolves around the usage of the market-based numbers and the rations of financial statements in order to determine and compare the companies in terms of profitability, debt, risk, efficiency, etc. The benefit for using the ratios is their simplicity and ability to generate crucial queries, because these ratios are segregated into different categories such as, return, profitability of sales, turnover, and risk.
– Accounting Quality Analysis stage determines how effectively the company passes on its financial standing and performance to investors through accounting reports. It is to be ensured that the information in the financial statements is based on truth and fairness. Quality can be determined through both qualitative and quantitative methods, of which qualitative method deals with assigning scores to the company based on its activities regarding accounting failures.
– The last step is of Valuation, in which the previous stages determine the value approximation; moreover, the differences between the management and investors are determined by the gap between the actual values and market values. The smaller the gap, the better for both the investors and the company; otherwise, investors could bear the loss and may take some action against the company.

The authors mentioned the points regarding the valuable questions incurring within the organization that help it to develop confidence when disclosing the financial statements information. I totally agree with this, the reason being that the questions relating to different kinds such as analysis, synthesis, and evaluation, they all give an overview of how the organization is coping with the financial data; moreover, it respectively provides certain key questions and reminders that might be missing and might be overcome by the management for the sake of disclosure without any mistake and blunder. And this is true that when the organizations consider all these important queries and reminders, they also manage to provide the financial information honestly, fairly, and truthfully that becomes reliable and helpful for the investors.

As far as the steps for making financial statements are concerned, the first stage provides the company with a platform to reduce the ambiguity and errors that might occur, and for that the organizations must abide by the accounting rules and regulations. For instance, off-balance sheet activities – if going fine – may be mentioned in the reports for good impression, but when the company is bearing a loss and threat, it might adjust some things as to leverage the effects of benefit and loss. There is nod doubt that ratio analysis provide quick and simple information regarding the company’s financial standing; moreover, comparisons and changes over certain period of time can also be determined. But they might fail sometimes especially in case of prediction for the upcoming information, it is because of the varying changes that occur internally and as well as externally.

Since, the investors seek for the accounting quality and proper accounting practices by the company, so having a sound accounting quality can really put and organization ahead of others; moreover, this criteria keeps the company on its toes to abide by the fair rules and practices. Finally, valuation is very important aspect for the companies because the differences between the firm’s actual figures and market figures can put the company on the beneficial or harmful size, based on the intensity of the gap. This stage is very crucial and hence compels the firms to ensure the fair and honest accounting practices within it and to carry on the first three stages effectively.

Now let’s review and analyze the financial standing and changes that took place at Walmart and compare them with its competitors – Target and Costco. Walmart has been performing outstandingly since 1995 till 2008, due to its USP (unique selling proposition) of ‘always low prices’, along with the sensible and handy investments. Walmart’s sales kept on increasing along with the average of 13% rise in revenues from 1998 till 2007, its sales in 1998 were 2.4 times more than the combined sales of Target and Costco, but amazingly the stock prices were not rising, and one reason for this is the poor performance by the stock markets which fell down greatly.

It means that the investment by the investors in purchasing, shares and other stocks of the company was stagnant and kept and a lower level. The company’s ROE (return on equity) was in the low 20’s due to the ineffective investment by the investors in the stocks. ROA was declined from 1998 to 2007 due to the low profit margin (as compared to Target) that incurred due to lower income and increased investment in the total assets, and also because of the declining trend in the turnover ratio.

Increasing and positive trend is seen in the profitability part of Walmart, and that was due to the efficiency brought in by reducing the cost of goods sold and selling, general and administrative expenses. Where as, Target’s profit margin increased sharply due to the decline in SG&A expenses and the total operating costs. If we see the overall changes that occurred at Walmart from 1998 to 2007, the financial indicators are more or less the same, with an increase in profit margin due to increased sales, but reduction in Assets turnover due to the inefficient utilization of assets and making the most of them. Walmart mainly focused on keeping the overall costs down, as to increase the productivity level; it reduced the sales costs and SG&A costs to a great extent that bolstered it to achieve the higher income level. Not only this, low costs relating to insurance, marketing, and global sourcing done by Walmart also helped.

Walmart’s sales increased by 238%, which is much more that Target’s 130% and Costco’s 194%; hence capital investments were required. But since the company wasn’t getting enough investment, it cut down the asset turnover rate. The productivity at Walmart was low due to the increase in new stores that were being located in different areas as an act of spreading the firm and gain more market share, along with the low skilled personnel. The international investment, no doubt, boosted the performance and productivity from 2000 to 2007; but at the same time, it reduced domestic store’s profitability and turnover.

Moreover, the depreciation rate has been increasing in the domestic stores and clubs, and same is the trend with international market of Walmart. Talking about the Accounting quality, we can determine, from the financial indicators, that all three companies were not violating accounting rules and were not manipulating them from the period of 1999 to 2007. Walmart’s common stock improved due to the sustainable trend in the ROA, which also enabled faster growth.

After reading and analyzing the article, we can say that the authors have emphasized on the importance of questions regarding the accounting rules, standards, practices, and financial information disclosure that actually boosts up the confidence level of the management of the firm and keep them on track by ensuring the financial and accounting practices in a true and honest way. The authors argue that the development of software tools and questions must be assigned to the specialists, so that no compromise is done on the cost of accounting quality.

Moreover, authors also elaborated on the individual role and importance that is played by the four steps in creating the financial statements; of which the last one of ‘valuation’ is very important that can decide the company’s and investor’s benefits or losses. In addition, each step depends on the other one, hence letting the firm to perform each step carefully and to the fullest. Walmart, which was ranked the top company of the world in 2002 till 2005, and in 2007, has adopted the strategy to lower down its costs and increase sales, hence resulting in the increase in profitability and productivity.

References

De Mello-e-Souza. C. A. and Awasthi. V. N. (n.d.) Probing Financial Statements, In a Post-Sarbanes-Oxley World. Strategic Finance.

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Walmart, Target, and Costco: Probing Financial Statements

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