How_to_Make_Economic_Decisions

How to Make Economic Decisions Jill R. Edwards University of Phoenix Intermediate Financial Accounting II ACC/422 Malcolm Veazie December 20, 2010 How to Make Economic Decisions Wal-Mart is the publically held company selected to use as the basis for this paper. Wal-Mart is one of the world’s largest retailers. Wal-Mart has over 3,000 stores in the United States and nearly 1,300 operations internationally. Wal-Mart has also been at the top of the Fortune 500 list of America’s largest corporation ranked by sales for four years in a row. The details of this paper will examine the disclosures associated to cash and cash equivalents, receivables, and inventory for Wal-Mart. It will also identify the components of cash and cash equivalents. Cash and cash equivalents Cash and cash equivalents consist of coins, currency, checking accounts, petty cash, checks received but not currently deposited, savings accounts, and short-term investments to name a few. The amount a company has in cash and cash equivalents are shown on the balance sheet labeled total current assets. A company reports several items on the financial statement. The current asset portion of the balance sheet is the source of the company’s accessible funds and crucial to the company’s operation. To an investor, cash and cash equivalents assist in discovering how stable a company is and if the company is competent enough to cover all the company’s liabilities. An investor performs a comparison from prior years to current, to determine if the company is financially healthy. According to Wal-Mart’s balance sheet the company reports the total for cash and cash equivalents for January 31, 2010 as $48,331.10 (this value is stated in millions). This amount consists of cash and short-term investments, total receivables, total inventory, prepaid expenses, and other assets. From January 31, 2006 to January 31, 2010 Wal-Mart has experienced an increase in the company’s cash and cash equivalents in the amount of $4506. According to Wal-Mart’s cash flow statement this increase in cash came from an increase in the company’s operating activities. In the last four years, Wal-Mart has not experienced a net cash loss. The company has maintained a positive cash flow and has remained successful. Receivables Accounts receivable take place as a result of a customer receiving inventory or services before funds for the inventory or services are collected. Merchandise or services are received by the customer; he or she receives and invoices, and pay the balance at a later date. As sales rise, the investments a company takes in receivables rise as well. The receivable accounts for Wal-Mart consist for the most part of receivables from pharmacy sales produced by insurance companies, suppliers from incentive programs or marketing, and real estate transactions. The receivables also consist of funds due from banks for debit cards, credit cards and EBT operations that take more than seven days. The receivables of a company are regularly reported as an asset because accounts receivables symbolize a legal responsibility for the customer to submit cash for his or her debt to the company. On Wal-Mart’s financial statement, the balance sheet shows $4, 144.00 (this value is stated in millions) as the amount of assets the company has as of January 31, 2010. Inventory Inventory of a company is mainly the goods and materials a company has to re-sell for a profit. For a company that sells products, like Wal-Mart, inventory is regularly the first use of cash. Selling inventory will not bring cash into the company, this only creates a receivable. For a company like Wal-Mart, it is imperative that the inventory is managed properly to keep up with the customers’ demands, prevent from acquiring a lot of cash tied up in inventory, and to avoid running out of inventory for the customers. Wal-Mart values the inventory of the company by using the last-in, first-out (LIFO) method. The inventory value of Wal-Mart increased by $1250 from January 31, 2006 to January 21, 2010, and this was because of opening new stores and expanding. Acquiring more inventories is the only way Wal-Mart will be able to keep up with customer demands; inventory for the store is also the largest section of the asset section. Conclusion Analyzing the disclosures enclosed in a company’s financial statement is imperative to comprehending the heath of a company. Having a comprehensive understanding of receivables, cash and cash equivalents, and inventories is of great importance to investors and the financial success of the company. References Averkamp, H. (2004-2010). What is included in cash and cash equivalents'. Retrieved 12/20/10, from www.accountingcoach.com Wal-Mart Quick Facts. (2010). Retrieved 12/20/10, from www.ufcw.org Wal-Mart Stores Inc: Financial Statement. (2010). Retrieved 12/20/10, from www.moneycentral.msn.com