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Home Depot Financial Statements Paper

Essay by   •  July 20, 2011  •  Case Study  •  1,365 Words (6 Pages)  •  4,825 Views

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Businesses need to track and have a way to know if they are profitable or losing money, determine what changes need to be made, how resources should be used, and/or should the business continue doing business, to name a few. This is done through accounting and the use of financial statements and non-financial statement information. Financial statements are the roadmap to companies and investors to answer the questions that are asked to determine the fate of the company. This paper will look at the three basic financial statements, Consolidated Statement of Earnings, Balance Sheet and Statement of Cash Flows, and how they relate to The Home Depot in 2008.

Consolidated Statements of Earnings - Income Statement

The first basic financial statement is called the Consolidated Statements of Earnings or commonly called the Income Statement or Profit and Loss Statement. The consolidated statement of earnings combines "the revenue, expenses, and income of a parent company and its subsidiaries" (Financial Dictionary, 2011). The income statement provides the primary source of information to tell if the company is profitable or not. The consolidated income statement refers to the entire corporation, not just its individual parts.

The Income Statement is important because right away you can tell if the company is profitable or losing money. Besides being able to see if the company is profitable you can gain other understandings about the company. Based on Income Statement information the company and investors can calculate ratios that will help the company make better informed decisions on what direction they should go and will provide data to investors so they can determine if they want to invest, continue to invest or discontinue investing in the company. Some common ratios based on the Income Statement are: Gross Margin, Profit Margin (after tax), and Earning per Share (AccountingCoach, 2011). Based on The Home Depot's 2008 Annual Report we can determine these ratios. As of February 1, 2009, The Home Depot's Gross Margin was .3365%, Profit Margin (after tax) was -0.0000072, and the Earnings per Share were $1.34. These numbers don't mean anything unless you compare them to prior periods. Based on prior periods, The Home Depot's Gross Margin, Profit Margin and Earning per Share have declined for three years in a row. This is based on lower net sales and increased operating expenses. Management could use this information to conclude that they need to find a way to increase sales and if sales don't rise they need to reign in operating expenses (The Home Depot, 2008). One way to reign in operating costs is to close underperforming stores and/or business units.

Balance Sheet

The next financial statement is the balance sheet or sometimes called the statement of financial positions. The balance sheet summarizes a company's assets, liabilities and shareholders' equity at a specific point in time (usually at the close of the accounting period) into three sections: the assets section, the liabilities section and the shareholders' equity section (Investopedia, 2011). The purpose of the balance sheet is to show the company and investors what the company owns and owes, and how much has been invested in the company by shareholders.

Typically, balance sheet information is invaluable by itself, but is useful when compared with previous financial periods or other company's balance sheet information. Popular ways to interpret balance sheet data is through the use of ratios and comparing those ratios to earlier periods. The popular balance sheet ratios are: Working Capital, Current Ratio, and Quick Ratio (Accounting Coach, 2011). Based on The Home Depot's 2008 Annual Report we can determine these ratios. As of February 1, 2009, The Home Depot's Working Capital was $2,209 compared to $1,968 as of February 3, 2008, Current Ratio was 1.198% compared to 1.15% as of February 3, 2008, and their Quick Ratio was .134:1 compared to .135:1 as of February 3, 2008. Based on this information, The Home Depot's Balance Sheet information shows their assets are down in 2008 due to less accounts receivable and less product in inventory. Their liabilities are also down due to less money tied up in debt.

Statement of Cash Flows

The statement of cash flows compliments the balance sheet and income statement and is a mandatory part of a company's financial reports. This report shows the amounts of cash and cash equivalents entering and leaving the company (Investopedia, 2011).

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