Cases:  

Accounting Theory

Financial Accounting Theory

and Analysis

Reports by Erwin Rhodes

 Accounting Theory ACC-540-MBOL1
Presented to: Dr. Passard C. Dean.
Saint Leo University
Cases:  Accounting Theory

Case 7-2 The Use of Current Value

a. Determine how current values might be determined for investments, land, buildings,
equipment, patents, copyrights, trademarks, and franchises.

The current values for investments, land, buildings, equipment, patents, copyrights, trademarks, and
franchises are determined by three different techniques. The market approach is a business valuation
method that can be used to calculate the value of property or as part of the valuation process for a
closely held business. Additionally, the market approach can be used to determine the value of a
business ownership interest, security or intangible asset[ CITATION Inv161 \l 1033 ]. Market approach
quotes prices in the active market such as matrix pricing. Next, the cost approach is an approach
recognized the amount is would take to replace the asset or its equivalent. Last is the income approach,
which uses the various techniques to find the current value of the future cash flow such as net present
value. .

B. How might the use of current values in the accounting records cause earning volatility?

First, one must understand that earning volatility is a statistical measure of the dispersion of returns for
a given security or market index. Commonly, the higher the volatility, the riskier the security. In other
words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's
value. A higher volatility means that a security's value can potentially be spread out over a larger range
of values. This means that the price of the security can change dramatically over a short time period in
either direction. A lower volatility means that a security's value does not fluctuate dramatically, but
changes in value at a steady pace over a period of time[ CITATION Inv161 \l 1033 ]. When you set the
current value to all assets, their value continuously change because the current value of assets change
continuously in order to stay current. Also the value of depreciation continue to change cause net
earnings to do the same. Therefore you have the defined earning volatile.

C. Discuss how management might manage earnings using current cost data.

Management must first consider that the availability of various observable market inputs and their
relevant influence on fair market value estimations and predictions. The measurement of fair value
results in the validity of the different valuations models as they might leave certain key assumptions, the
change in firm earnings, and the systematic risk associated with it during downturn. M

D. How do the requirements originally established by SFAS No. 157 affect the use of fair value
measurement in financial statements?

The requirements originally established by SFAS N. 157 affect the use of fair value measurement in
financial statements as the trend toward fair value accounting appears to be permanent. Fair value
accounting requires recognition of balance sheet amounts at fair value, and changes in fair values to
have an impact on the income statement, via stockholder equity. Managers should be aware of the
various measurement issues involved in valuing the financial instruments in their companies, especially
when subjective fair value estimates are involved.
Cases:  Accounting Theory

Case 7-3 Analysis of a Statement of Cash Flow

Obtain a copy of a large corporation’s annual report and refer to the statement of cash flow.

Required:

A. Did the company use the direct method or the indirect method of disclosing cash flow?

I chose Walmart’s 2015 statement of cash flow. Walmart prepares is its cash flow statement under the
indirect method.

B. Comment on the relationship between cash flow from operations and net income for the year of
the statement and the previous year.

In the cash flows from operating activities section of Walmart’s cash flow statement, the company
reconciles its net income of $16.7 billion to net cash provided by operation activities of $23.26 billion for
2014 and $17.1 billion net income to net cash provided by operation activities of $28.56 billion for 2015.
Overall an increase in both areas. Cash Flow from operating activities: Walmart reported a positive
operating cash flow of 27.39B for 2016 and has seen a decrease from the previous year. Operating cash
flow or working capital comes from main business activities.

C. What were the significant sources of cash from operation activities during the period covered by
the statement? What percentage of total cash inflows do these sources represent? Answer the same
question for previous period.

Walmart most significant sources of cash from operating activities in 2015 were net income at 51%,
depreciation and amortization at 49%, and change in accounts payable and other current liabilities at 7%
[ CITATION Mar16 \l 1033 ]. In 2014, the most significant sources of cash were net income at 51%. In
2014, numbers were almost the same in net income and depreciation and amortization. The most
important change was account receivable from 3% to 16%.

Significant Sources of Cash from Operating Activities

2014 Source of Income Amount (in millions) Percentage of Total Cash Inflow

Net Income 16.7 7.83 47%

Depreciation, Depletion, & Amortization 8.87 8.87 53%

Change in acct. payable 531(M) 3%.

2015 Source of Income Amount (in Billions) Percentage of Total Cash Inflow

Net Income 16.81 7.71 46%

Depreciation, Depletion, & Amortization 9.17 9.1 54%

Change in acct. payable 2.68 16%

Cases:  Accounting Theory

D. Was the cash from operations more than or less than dividends during the period covered by the
statement and the previous period?

The cash from operating activities for Walmart was more than dividends paid during both the statement
period and the previous period.

2015 2014

Walmart Net Cash from (used by) Operating Activities 28.56B 23.26B

Payment of Dividends -6.79B -6.14B

E. What were the firm’s major investing activities during the period covered by the statement and the
previous period? Were cash flows from operations more or less than cash flows from investing
activities for the company in question?

Walmart‘s major investing activities for 2015 and 2014 included cash used to Issuance (Purchase) of
Equity Shares, Issuance (Repayment) of Debt Securities and Increase (Decrease) in Bank & Other
Borrowings. Cash flows from operations was more than cash flows from investing activities.

2015 2014

Walmart Net Cash from (used by) Operating Activities 28.56B 23.26B

Walmart Net Cash from (used by) Investment Activities -11.13B -12.3B

F. What were the most significant cash flows from financing activities during the year of the statement
and the previous year?

The most significant cash inflows for Walmart from financing activities in 2014 and 2015 was the net
change in cash and cash equivalents.

2015 2014

Other Cash from (used by) Financing Activities -2.25B -1.21B

Walmart Net Cash from (used by) Financing Activities -15.07B -11.02B

Effect of Exchange Rate Changes on Cash -514M -442M

Walmart Net Change in Cash & Cash Equivalents 1.85B -500M

Cash & Equivalents at Beginning of Year 7.28B 7.78B

Cash & Equivalents at Year End 9.14B 7.28B

[ CITATION Mar16 \l 1033 ].

Cases:  Accounting Theory

Works Cited

BusinessDictionary.com. (2015, June 4). Retrieved from BusinessDictionary.com:

http://www.businessdictionary.com/definition/centralized-purchasing.html

Investopedia . (2016, Jan 25). Retrieved from Investopedia :

http://www.investopedia.com/terms/m/market-approach.asp

Marketwatch. (2016, Jan 26). Walmart Cash Flow. Retrieved from MARKETWATCH:
http://www.marketwatch.com/investing/stock/wmt/financials/cash-flow

Richard G. Schroeder, M. W. (2013). Financial Accounting Theory and Analysis: Text and Cases Eleventh
Edition. Hoboekn,Nj: John Wiley & Sons, Inc. .