Balance Sheet Analysis
The discussion questions for Weeks 2 – 4 are designed to help teach you to derive meaning from financial statements. Each week you will select a line item and use Variance Trend Analysis to make some initial assessments about how the company is performing. Collectively, as a class, we will seek to find the “story behind the numbers.”
Let’s start applying what you have learned to a real-life Balance Sheet.
- Locate and post a screenshot of a Balance Sheet from the investor relations section of the website from the latest fiscal year for one of the following companies:
- Pick a Balance Sheet line item from the following list:
- Accounts Receivable
- Property, Plant, and Equipment (PP&E)
- Accounts Payable
- Long-Term Debt
- Total Equity
- Retained Earnings
- What does this line item measure and why is it important item for Management to understand this number?
- From the Balance Sheet, identify the Current Year and the Previous Year’s closing amounts for your line item. Share these with the class using a data table similar to the below:
Jack’s Toy Shop
- Answer the following questions:
- Has the amount for the line item increased or decreased, and by how much (dollar and/or percentage)?
- Is this a “good” thing or a “bad” thing for this company?
- What might this mean for the organization?
- What might management do to improve this line item?
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
!st person to respond to
Locate and post a screen shot of a Balance Sheet from the investor relations section of the website from the latest fiscal year for one of the following companies: Walmart
Pick a Balance Sheet line item from the following list:
As an investor, I found retained earnings an interesting line item on the Balance sheet.
What does this line-item measure and why is it important item for Management to understand this number?
Retained earnings measure all the company’s profits that have not been returned to the shareholders as dividends (Ittelson, 1). Fernando described it as “historical profits earned by a company, minus any dividends it paid in the past (2). Companies retain earnings; otherwise, their surplus is for various reasons, and management needs to understand this number as it relates to, for example, future investments, possible acquisition/mergers, shares buyback, paying back debt, and or other loans (2). The bottom line is to understand what is available and plan how to utilize the surplus efficiently.
From the Balance Sheet, identify the Current Year and the Previous Year closing amounts for your line item. Share these with the class using a data table similar to the below:
Company Walmart 20212020Retained Earnings $ 8,876,300.00 $ 8,394,300.00Note: Amts in Mil
Walmart’s retained earnings increase of $4,820,000 from $8,394,300 to 876,300.00 indicates the company’s increased profits from 2020 to 2021. A positive sign for the any investor/shareholder. Management can also look at whether they keep dividends percentage at the same level, or can they afford an increase, as I alluded to earlier look at making future investments, possible acquisitions/mergers, and paying down debt.
Based on five of historical data (Wallstreet Journal, 4), Walmart’s lowest retained earnings were captured in 2019 ($8,078,500) and highest in 2017 ($8, 935,400.) The 2021 data suggests a positive trend.
1. Walmart Annual Report. 2021. Balance Sheet. Retrieved from: https://s2.q4cdn.com/056532643/files/doc_financials/2021/ar/WMT_2021_AnnualReport.pdf
2. Thomas R. Ittelson. 2020. Financial Statements.
3. Fernando, J. (2021). Retained Earnings. Investopedia. Retrieved from: https://www.investopedia.com/terms/r/retainedearnings.asp
4. Walmart Inc. WSJ Markets. Retrieved from: https://www.wsj.com/market-data/quotes/WMT/financials/annual/balance-sheet
Reply Email Author
2nd person to respond to
Good Day Class and Prof Armstrong,
1.) I have selected Target’s balance sheet for this week’s discussion post. (1)
2.) The line item I will be examining is Inventory.
3.) Inventory measures finished products and materials to be made into products (2). Inventory is broken down into raw material inventory, work-in-progress inventory, and finished goods inventory. It is important for management to pay attention to this line item because they may need to increase it when they are forecasting increases in sales. If management fails to pay attention to inventory levels it could lead to a failure to satisfy customer demand (3). Management also needs to pay attention to inventory levels to ensure it doesn’t take on additional risk with having access inventory levels (3).
5.) The inventory amount has decreased by $505M between 2019 and 2020. In order to determine risk with the inventory levels shown on the balance sheet you need to also look at a company’s annual report (3). The reason for this is because the balance sheet only states how much inventory value a business has. As stated in targets 2019 Annual Report, “We achieve effective inventory management by staying in-stock in core product offerings, maintaining positive vendor relationships, and carefully planning inventory levels for seasonal and apparel items to minimize markdowns.” (1). Also stated in the 2019 Annual report the reduction in inventory was “partially due to focused efforts to reduce inventory across multiple categories where we optimized on-hand quantities and assortment. Additionally, elevated inventory levels in the prior year reflected ntentional investments in toys merchandise.” (1). So in this case, the reduction in inventory levels was planned by management and I would say it is a good thing based on the financial results.
- Download the 2019 Target Annual Report | Target Corporate. (2020). Retrieved 15 July 2020, from https://corporate.target.com/_media/TargetCorp/annualreports/2019/pdfs/2019-Target-Annual-Report.pdf
- Thomas R. Ittelson. 2020. Financial Statements, Third Edition.
- Gene Siciliano. 2015. Finance for Nonfinancial Managers.