Question

This Comprehensive Problem is to acquaint you with the content of the 2009 financial state-
ments of Home Depot, Inc. , reproduced in Appendix A of this textbook. (The 2009 financial
statements are for the fiscal year ended January 31, 2010.) The problem contains three major
parts, which are independent of one another:Part I is designed to familiarize you with the gen-
eral 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 state-
ments. 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.
Part I Annual reports include not only comparative financial statements but also other
sources of information, such as:
• A multiyear summary of financial highlights, a summary of key statistics for the past 5 or
10 years.
• Several pages of Notes that accompany the financial statements.
• Reports by management and by the independent auditors in which they express their
respective responsibilities for the financial statements.
Instructions
Answer each of the following questions and briefly explain where in the statements, notes, or other
sections of the annual report you located the information used in your answer.
a. How many years are covered in each of the primary comparative financial statements? Were all
of these statements audited? Name the auditors. What were the auditors’ conclusions concern-
ing these statements?
b. Home Depot, Inc. , combines its statement of retained earnings with another financial state-
ment. Where are details about changes in the amount of retained earnings found?
c. Over the three years presented, have the company’s annual net cash flows been positive or
negative from ( 1 ) operating activities, ( 2 ) investing activities, and ( 3 ) financing activities?
Has the company’s cash balance increased or decreased during each of these three years?
Part II Assume that you are the credit manager of a medium-size supplier of building
supplies. 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 end-
ing January 31, 2010, and February 1, 2009 (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 consid-
erations 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 write a memorandum explaining your decision. (In
your memorandum, you may refer to any of your computations or observations in parts a
through c, and to any information contained in the annual report.)
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 III As general background, study the “10-Year Summary of Financial and Operating
Results.”
Instructions
a. Compute the following for the fiscal years ending January 31, 2010, and February 1, 2009
(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 prof-
itability during the period covered in your analysis in part a above. Justify your conclusion(s).



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