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COMPREHENSIVE PROBLEM 4
This Comprehensive Problem is to acquaint you with the content of the 2012 financial statements
of Home Depot, Inc. , reproduced in Appendix A of this textbook. (The 2012 financial
statements are for the fiscal year ended February 3, 2013.) The problem contains three major
parts, which are independent of one another: Part I is designed to familiarize you with the
general contents of a company’s financial statements; Part II involves analysis of the company’s
liquidity; and Part III analyzes the trend in its profitability.
If you work this problem as a group assignment, each group member should be prepared to
discuss the group’s findings and conclusions in class.
A good starting point for understanding the financial statements of a company such as
Home Depot, Inc. , is to understand the accounting policies used in preparing those statements.
The first note accompanying the financial statements provides a brief description of
the major accounting policies the company used. Most of the areas discussed in this note have
been covered in this text.
60 Eas
y
50 Medium
40 Stron
g
Evaluate the liquidity of the company from the perspective of a supplier. Involves ratios,
judgment, and explanation of conclusions.
Includes evaluation of the company’s level of profitability and a discussion of the
implications for stock price.
Form and Content of an Annual Report
The Home Depot, Inc.
Evaluating Liquidity
An analysis of the annual report of a publicly owned corporation. Actually three comprehensive problems in one, with the
three parts independent of one another. All parts build communication skills and make excellent group assignments.
Student is asked a variety of questions that can be answered directly from various elements
of the annual report. An excellent introduction.
The Home Depot, Inc.
Part I:
Part II:
Part III: Evaluating the Trend in Profitability
60 Minutes, Easy
PART I
a.
b.
c. From the statement of cash flows, it can be seen that the company's cash flows from
operating activities have been positive for all three years: $6,975 million, $6,651 million,
and $4,585 million in 2012, 2011, and 2010, respectively. The cash flows from investing
COMPREHENSIVE PROBLEM 4
THE HOME DEPOT, INC.:
Comparative balance sheets are presented for two years: 2012 (year ending February 3,
2013) and 2011 (year ending January 29, 2012). Three years of comparative statements of
earnings are presented for the same two years, plus 2010 (year ending January 30, 2011).
Rather than presenting a separate statement of retained earnings, Home Depot presents a
Consolidated Statement of Stockholders' Equity. In that statement is a column (4th
column of numbers from left) that shows changes in retained earnings for the three year
period. The descriptive captions to the left, combined with the numbers in the retained
earnings column, make up the information that would otherwise have constituted a
separate statement of retained earnings.
These financial statements were audited by the independent auditors, KPMG LLP. The
auditors issued an unqualified audit report, concluding that the financial statements were
prepared in accordance with generally accepted accounting principles and present fairly
the financial position, results of operations, and cash flows for each of the years presented.
50 Minutes, Medium
F
e
b
.
3
,
2013
J
an.
29
,
2012
a.
(
1
)
1.34 to 1
1.55 to 1
(
2
)
0.34 to 1
0.34 to 1
(
$2
,
494 + $1
,
395
)
÷ $11
,
462
COMPREHENSIVE PROBLEM 4
THE HOME DEPOT, INC.:
(Dollars in Thousands)
PART
II
(
$1
,
987 + $1
,
245
)
÷ $9
,
376
For the Years Ended
Current ratio:
$14
,
520 ÷ $9
,
376
Quick ratio:
$15
,
372 ÷ $11
,
462
b.
c.
Liquidity has decreased between 2011 and 2012, as evidenced by a lower current ratio
(1.34 compared with 1.55), lower working capital, and a significant percentage decrease in
receivables, the most liquid assets have increased.
COMPREHENSIVE PROBLEM 4
PART II (continued)
THE HOME DEPOT, INC.:
In the Consolidated Statements of Stockholders' Equity it is clear that the company has an
aggressive policy of purchasing treasury stock. The following amounts of cash were used
for this purpose in 2012, 2011, and 2010, respectively ($4,000 million, $3,501 million, and
40 Minutes, Strong
F
e
b
.
3
,
2013
J
an.
29
,
2012
a.
(
1
)
$
74
,
754
$
70
,
395
$
70
,
395
$
67
,
997
THE HOME DEPOT, INC.:
(Dollars in Thousands)
For the Years Ended
Percenta
g
e chan
g
e in net sales:
Net sales in current
y
ear
COMPREHENSIVE PROBLEM 4
PART
III
Net sales in
p
revious
y
ear
F
e
b
.
3
,
2013
J
an.
29
,
2012
(
6
)
$
4
,
535
$
3
,
883
For the Years Ended
Net earnin
g
s
Avera
g
e stockholders' e
q
uit
y
PART III
(
concluded
)
THE HOME DEPOT, INC.:
Thousands of Dollars
Return on avera
g
e total e
q
uit
y
:
