Wal-Mart Accounting

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(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the entity; and

(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

For US GAAP, delivery of the goods must occur prior to recognizing of revenue. IAS-18 Revenue Recognition criteria (a) and (b) takes into the consideration that delivery is not always necessary for revenue recognition (for example, international sales and layaway sales) if the risks and rewards of ownership of the goods have been transferred.

Criteria (c) and (d) are similar as GAAP revenue recognition requirements.

When Walmart offers warranty service or other services to the buyers, it should ensure that both amount of revenue and cost can be measured reliably, otherwise revenue recognition is precluded.

- Review your company’s revenue over the past two years. Analyze the change in revenue (increase/decrease) and give the reasons for this change.

Walmart had a total revenue of $482,130 (in millions), and $485,651 (in millions) for fiscal year 2016, and 2015 respectively.

According to its fiscal year 2016 annual report, the $482 billion excludes more than $17 billion in currency impacts (net sales for the year were negatively impacted by currency exchange rate fluctuation), otherwise its revenue would have been more than $499 billion which exceeds fiscal year 2015 revenue. In addition, a decrease of $1.9 billion in fuel sales resulted primarily from lower selling price for fuel at Sam’s Clubs. Company used low fuel prices to attract and retain its customers. In addition, Sam’s Club members get 5% cash back on fuel at Sam’s Club and its gas stations. Effect of its fuel sales negatively impacted its total revenue. However, Walmart U.S. segment and e-Commerce marched higher on their revenue growth which offset some of the loss from currency exchange rate and fuel sales.

- Reflecting upon your company’s balance sheet, identify the unearned revenue accounts listed. How does your company handle the proper accounting treatment with regard to recognizing revenue from unearned revenue account?

The account that Walmart uses for its unearned revenue (from membership fee and shopping cards) is accrued liabilities in its consolidated balance sheet.

For Sam’s Club membership fee revenue, Walmart recognizes the revenue both in the US and internationally over the term of the membership which is typically 12 months. The deferred membership fee is included in accrued liabilities (FY2016 annual report).

For shopping cards and store credits, Walmart doesn’t recognize the revenue until they are being redeemed at the company checkpoint. Walmart management reviews and updates the estimates of card usage periods and redemption rates periodically, then estimates unredeemed shopping cards and recognizes revenue based on these two elements.

Income Taxes

- If Congress voted to eliminate corporate taxes, what would be the effect on your company’s income statement and balance sheet? Defend your response.

According to Wahlen, J. (2013), “Corporations have to report their business results to numerous stakeholders, of which, two of the most important are financial statement users and tax authorities” (pg. 18_3). There are differences in accounting methods for financial reporting and income tax reporting because one is governed by GAAP and the other is governed by Internal Revenue Code. When differences occur, deferred income tax liabilities and/or assets must be reported on its balance sheet, and tax expense must be reported on its income statement.

If Congress voted to eliminate corporate taxes, Walmart won’t need to calculate the difference between taxable income and pretax financial income, measure the deferred tax liability or deferred tax asset, determine the allocation method of income tax, and/or recognize the appropriate valuation allowance.

The effect on Walmart’s income statement would be: no income tax expenses. Therefore, it will result in higher net income which leads to higher earnings per share.

The effect on Walmart’s balance sheet will be: no current tax liability, no deferred tax liabilities and/or assets, no valuation allowance, higher retained earning which leads to an increase in shareholders’ equity.

- Calculate the income tax rate for your chosen company. What effect will an increase in income of $2,000,000 have on your company?

According to PWC (2016), a corporation has taxable income over $18,333,333, its tax rate percentage on excess is 35%. According to Walmart’s 2016 Annual Report, it lists income from continuing operations before income taxes of $21,638 (in millions). Because $21,638 (in millions) is over $18,333,333, its US statutory tax rate was 35% for fiscal year 2016. An increase in income of $2 million would result in an increase in income tax expenses by $700,000.

- What are the effects on the balance sheet and income statement? Justify your response.

The effect on the income statement would be a decrease in net income. Therefore, its net income per common share would be decreased which would in turn cause a decrease in dividends. The effect on its balance sheet would be an increase in tax liability, increase in valuation allowance, and decrease in retained earning in shareholders’ equity section.

- How much did your company pay in foreign taxes last year? What percentage of its income is United States vs. foreign?

According to Walmart’s 2016 annual report, it paid $1,400 (in millions) in foreign taxes. Income from continuing operations for US market was $16,685 (in millions) and for non-US market was $4,953 (in millions). Therefore, US vs. foreign income percentage was 77% vs. 23%.

Leases

- What are the differences between operating and capital leases?

According to Wahlen, J. (2013), “…a lease that transfer substantially all the risks and benefits of ownership is in economic substance a purchase by the lessee and a sale by the lessor”