is.wis.scoe.030 Interpreting statements of changes in owners equity

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1 Income Statements» What Do I See?» Statements of Changes in Owner s Equity» Exercises S O L U T I O N S is.wis.scoe.030 Interpreting statements of changes in owners equity This exercise will help you interpret statements of changes in owners equity by connecting them to balance sheets and income statements for Whole Foods Market and two drug store chains: Walgreens and Alliance Boots. See the companies statements at the end of the solution. Part I This pertains to Whole Foods Market s statements. (a) What line items and numbers are the same on Whole Foods balance sheets and statements of shareholders equity for fiscal 2010 and 2009? Hint: There are five line items and numbers that are the same across the statements for each year. Here are the common items and numbers on the two statements for the balances on September 27, 2009 and September 26, 2010: Line items fiscal 2009 fiscal 2010 Shares outstanding 140, ,033 Common stock $ 1,283,028 $ 1,773,897 Accumulated OCI (loss) $ (13,367) $ 791 Retained earnings $ 358,215 $ 598,570 Total shareholders equity $ 1,627,876 $ 2,373,258 This demonstrates the connections between the beginning and ending balances. (b) How much comprehensive income did Whole Foods recognize during fiscal 2010? $259,991, as reported on the statement of changes in owners equity. (c) How much net income did Whole Foods recognize during fiscal 2010? $245,833, as reported on the statement of changes in owners equity. (d) How much other comprehensive income did Whole Foods recognize during fiscal 2010? $14,158, as derived from the statement of changes in owners equity. Comprehensive income = net income + other comprehensive income. Thus, $259,991 = $245,833 + $14,158. Alternatively, add the line items that comprise OCI on the statement: $14,158 = $1,564 + $12,943 + $ (349). (e) Whole Foods recognized $47,020 (thousand) increase in common stock when it issued stock to employees (pursuant to team member stock plans) during fiscal How many shares did the company issue? 1,822, as reported on the statement of changes in owners equity. The first column reports number of shares and its effects on the number of shares outstanding. You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC.

2 2 NAVIGATING ACCOUNTING Part II This pertains to Walgreen s statements. (f) What line items and numbers are the same on Walgreens income statement and statements of shareholders equity for fiscal 2010, 2009, and 2008? Hint: There s one line item and number that s the same across the statements for each year. Line item fiscal 2010 fiscal 2009 fiscal 2008 Net earnings $2,091 $ 2,006 $ 2,157 This demonstrates the connections between the statements and how three years are presented. (g) How much dividends did Walgreen s recognize during fiscal 2010? How much was this per share? $ 570 million. $.5875 per share, as reported on the statement of changes in owners equity. (h) Cash dividends are declared by the company s board of directors before they are paid to shareholders. When a dividend is declared, retained earnings decreases and a liability (dividends payable) increases. Combining these two events, we see that ultimately cash dividends reduce cash and retained earnings. Why does it make sense for retained earnings and thus the book value of the owners claims to decrease when a dividend is declared and paid? The combined balance-sheet consequences of declaring and paying a dividend are that cash and retained earnings both decrease by the amount of the dividend. The cash decrease signifies that cash has left the company and thus there are fewer assets than there were before the dividend was paid. The decrease in retained earnings and thus stockholders equity signifies that owners claims are not worth as much because assets decreased and the owners (rather than creditors) received the cash. Notice that the cash the owners receive exactly compensates for the decrease in the value of their claims. (i) True or False: Walgreens declared a dividend on its common stock in fiscal 2010, 2009, and True: Walgreens recognized $570, $471, and $394 in dividends for these years. (j) True or False: Walgreens recognized ($61) million of accumulated other comprehensive income (loss) for fiscal False: Walgreens recognized ($24), not $(61), of accumulated other comprehensive income for fiscal The $(61) of other comprehensive income explains the change from the beginning balance to the ending balance in accumulated other comprehensive income during fiscal The lesson here is that balance sheets recognize amounts at a point in time (e.g., accumulated at year end) but statements of shareholders equities also report changes during the reporting period. Part III This pertains to Alliance Boots statement. (k) How much comprehensive income, net income, and other comprehensive income did Alliance Boots recognize in its total equity (including non-controlling interests) during fiscal 2011? Line item fiscal 2011 Comprehensive income 715 Net income (profits) 615 OCI 100

3 EXERCISES 3 (l) What was the net effect of all transactions with Alliance Boots owners during fiscal 2011? 69 million. Alliance Boots ten types of transactions under the caption Transactions with owners during fiscal 2011 with a subtotal of 69 as the net effect on total equity. Part IV This pertains to Alliance Boots as well as Whole Foods and Walgreens. (m) Compare and contrast the column headers on each of the companies statements of changes in owners equity. What is common across the three companies? What appear to be synonyms? Here are the headings that are common across the statements or are synonyms: Retained earnings: all three companies Number of shares: Whole Foods and Walgreens Common stock: Whole Foods and Walgreens; Share capital is a synonym reported by Alliance Boots Common stock in treasury: Whole Foods; Treasury stock is a synonym reported by Walgreens Accumulated other comprehensive income (loss): Whole Foods and Walgreens; Other reserves is a synonym reported by Alliance Boots Paid-in capital: Walgreens; Share premium is a synonym reported by Alliance Boots (n) Identify common items that explain the changes in the companies retained earnings during fiscal Net income (net earnings or profits) is common across all three companies. Dividends decreased retained earnings for Whole Foods and Walgreens. (o) What do your observations above suggest in terms of how balance sheets and income statements connect to the statements of changes in owners equity? How might the incremental information on the statement of changes in owner s equity help investors forecast a company s future performance? The statement of changes in owners equity explains the reasons owner s equity changed from period to period on the balance sheet. The income statement discloses items that explain how the company performed for owners during the period, where net income (loss) increases (decreases) retained earnings and the value of the owners claims on the company. The components of comprehensive income provide very different types of information about a company s future performance. Generally, past and current years net incomes are better predictors of future net income than past and current years other comprehensive income is a predictor of future other comprehensive income. For example, absent strong evidence to the contrary, a company that does well in its primary business for several years suggests that it will do well in the future. In fact, research suggests that future net income can be forecasted relatively reliably from historical data. By contrast, forecasts of interest rates, stock prices, currency exchange rates and other economic factors associated with other comprehensive income are generally much less reliable.

4 4 NAVIGATING ACCOUNTING Figure 1 Whole Foods Market, Inc. Balance Sheets This figure is an excerpt from Whole Foods 2010 annual Form 10-K report, page 32. Consolidated Balance Sheets (In thousands) September 26, 2010 and September 27, 2009 Assets Current assets: Cash and cash equivalents $ 131,996 $ 430,130 Short-term investments available-for-sale securities 329,738 - Restricted cash 86,802 71,023 Accounts receivable 133, ,731 Merchandise inventories 323, ,602 Prepaid expenses and other current assets 54,686 51,137 Deferred income taxes 101,464 87,757 Total current assets 1,161,519 1,055,380 Property and equipment, net of accumulated depreciation and amortization 1,886,130 1,897,853 Long-term investments available-for-sale securities 96,146 - Goodwill 665, ,254 Intangible assets, net of accumulated amortization 69,064 73,035 Deferred income taxes 99,156 91,000 Other assets 9,301 7,866 Total assets $ 3,986,540 $ 3,783,388 Liabilities and Shareholders Equity Current liabilities: Current installments of long-term debt and capital lease obligations $ 410 $ 389 Accounts payable 213, ,597 Accrued payroll, bonus and other benefits due team members 244, ,983 Dividends payable - 8,217 Other current liabilities 289, ,838 Total current liabilities 747, ,024 Long-term debt and capital lease obligations, less current installments 508, ,848 Deferred lease liabilities 294, ,326 Other long-term liabilities 62,831 69,262 Total liabilities 1,613,282 1,742,460 Series A redeemable preferred stock, $0.01 par value, 425 shares authorized; zero and 425 shares issued and outstanding at 2010 and 2009, respectively - 413,052 Shareholders equity: Common stock, no par value, 300,000 shares authorized; 172,033 and 140,542 shares issued and outstanding at 2010 and 2009, respectively 1,773,897 1,283,028 Accumulated other comprehensive income (loss) 791 (13,367) Retained earnings 598, ,215 Total shareholders equity 2,373,258 1,627,876 Commitments and contingencies Total liabilities and shareholders equity $ 3,986,540 $ 3,783,388 Source:

5 EXERCISES 5 Figure 2 Whole Foods Market, Inc. Statements of Shareholders Equity and Comprehensive Income This figure is an excerpt from Whole Foods 2010 annual Form 10-K report, page 34. Consolidated Statements of Shareholders Equity and Comprehensive Income (In thousands) Fiscal years ended September 26, 2010, September 27, 2009 and September 28, 2008 Accumulated Common other Total Shares Common stock in comprehensive Retained shareholders outstanding stock treasury income (loss) earnings equity Balances at September 30, ,240 $ 1,232,845 $ (199,961) $ 15,722 $ 410,198 $ 1,458,804 Net income , ,524 Foreign currency translation adjustments (7,714) - (7,714) Reclassification adjustments for amounts included in income, net of income taxes ,302-2,302 Change in unrealized losses, net of income taxes (9,888) - (9,888) Comprehensive income 99,224 Dividends ($0.60 per common share) (84,012) (84,012) Issuance of common stock pursuant to team member stock plans 1,040 17, ,206 Retirement of treasury stock ,961 - (199,961) - Excess tax benefit related to exercise of team member stock options - 6, ,083 Share-based payment expense - 10, ,505 Cumulative effect of new accounting standard adoption (1,288) (1,288) Other 6 (498) (498) Balances at September 28, ,286 1,266, ,461 1,506,024 Net income , ,804 Foreign currency translation adjustments (8,748) - (8,748) Reclassification adjustments for amounts included in income, net of income taxes ,440-8,440 Change in unrealized losses, net of income taxes (13,481) - (13,481) Comprehensive income 133,015 Redeemable preferred stock dividends (28,050) (28,050) Issuance of common stock pursuant to team member stock plans 256 4, ,286 Excess tax benefit related to exercise of team member stock options Share-based payment expense - 12, ,795 Other - (248) (248) Balances at September 27, ,542 1,283,028 - (13,367) 358,215 1,627,876 Net income , ,833 Foreign currency translation adjustments ,564-1,564 Reclassification adjustments for amounts included in income, net of income taxes ,943-12,943 Change in unrealized losses, net of income taxes (349) - (349) Comprehensive income 259,991 Redeemable preferred stock dividends 358 5, (5,478) (283) Conversion of preferred stock 29, , ,052 Issuance of common stock pursuant to team member stock plans 1,822 47, ,020 Excess tax benefit related to exercise of team member stock options - 2, ,708 Share-based payment expense - 22, ,894 Balances at September 26, ,033 $ 1,773,897 $ - $ 791 $ 598,570 $ 2,373,258 Source:

6 6 NAVIGATING ACCOUNTING Figure 3 Walgreen Company Statements of Earnings This figure is an excerpt from Walgreen s 2010 annual report, page 24. Consolidated Statements of Earnings Walgreen Co. and Subsidiaries for the years ended August 31, 2010, 2009 and 2008 (In millions, except per share amounts) Earnings Net sales $67,420 $ 63,335 $ 59,034 Cost of sales 48,444 45,722 42,391 Gross Profit 18,976 17,613 16,643 Selling, general and administrative expenses 15,518 14,366 13,202 Operating Income 3,458 3,247 3,441 Interest expense, net (85) (83) (11) Earnings Before Income Tax Provision 3,373 3,164 3,430 Income tax provision 1,282 1,158 1,273 Net Earnings $ 2,091 $ 2,006 $ 2,157 Net earnings per common share basic $ 2.13 $ 2.03 $ 2.18 Net earnings per common share diluted Average shares outstanding Dilutive effect of stock options Average shares outstanding assuming dilution The accompanying Notes to Consolidated Financial Statements are integral parts of these statements. Source:

7 EXERCISES 7 Figure 4 Walgreen Company Statements of Shareholders Equity This figure is an excerpt from Walgreen s 2010 annual report, page 25. Consolidated Statements of Shareholders Equity Walgreen Co. and Subsidiaries for the years ended August 31, 2010, 2009 and 2008 (In millions, except shares and per share amounts) Accumulated Common Employee Other Treasury Common Stock Paid-In Stock Loan Retained Comprehensive Stock Stock Shares Amount Capital Receivable Earnings Income (Loss) Amount Balance, August 31, ,141,357 $ 80 $ 559 $ (52) $ 12,027 $ (4) $ (1,506) Net earnings 2,157 Cash dividends declared ($.3975 per share) (394) Treasury stock purchases (8,000,000) (294) Employee stock purchase and option plans 6,034,861 (55) 249 Stock-based compensation 71 Employee stock loan receivable 16 ASC 740 adoption impact 2 Additional minimum postretirement liability, net of $2 tax benefit 13 Balance, August 31, ,176, (36) 13,792 9 (1,551) Net earnings 2,006 Cash dividends declared ($.4750 per share) (471) Treasury stock purchases (10,270,000) (279) Employee stock purchase and option plans 9,655,172 (48) 297 Stock-based compensation 78 Employee stock loan receivable (104) Additional minimum postretirement liability, net of $29 tax benefit 28 Balance, August 31, ,561, (140) 15, (1,533) Net earnings 2,091 Cash dividends declared ($.5875 per share) (570) Treasury stock purchases (55,716,733) (1,756) Employee stock purchase and option plans 5,760,396 (5) 188 Stock-based compensation 84 Employee stock loan receivable 53 Additional minimum postretirement liability, net of $34 tax expense (61) Balance, August 31, ,605,053 $ 80 $ 684 $ (87) $ 16,848 $ (24) $ (3,101) Source:

8 8 NAVIGATING ACCOUNTING Figure 5 Alliance Boots Statements of Changes in Equity This figure is an excerpt from Alliance Boots 2010/2011 annual report, page 62. Group statement of changes in equity for the year ended 31 March 2011 Share capital Share premium Retained earnings Shareholders equity Other reserves Total Non controlling interests Total equity 2011 At 1 April ,065 2, , ,340 Profit for the year Other comprehensive income for the year Net exchange differences on translation of non-sterling denominated operations (12) (12) (15) (27) Defined benefit schemes net actuarial gains net of surplus restriction Movements on available-for-sale reserve including amounts recycled (9) (9) (9) Share of post tax other comprehensive income of associates and joint ventures Tax on other comprehensive income for the year (40) 25 (15) (15) (15) 100 Total comprehensive income for the year Transactions with owners Transfer from special reserve (34) Non controlling interests in businesses acquired Liability to acquire equity stakes from non controlling interests (362) (362) (362) Future dividend obligations to non controlling interests (28) (28) Dividends paid to non controlling interests (18) (18) Purchase of non controlling interests (92) (1) Non controlling interests in businesses disposed (12) (12) Contribution from non controlling interests (237) (237) At 31 March ,065 2, (15) 4, ,124 Share capital Share premium Retained earnings Shareholders equity Other reserves Total Non controlling interests Total equity 2010 At 1 April ,065 2, , ,224 Profit for the year (4) 604 Other comprehensive income for the year: Net exchange differences on translation of non-sterling denominated operations (1) 35 Defined benefit schemes net actuarial losses (694) (694) (694) Fair value losses on cash flow hedging instruments net of amounts recycled (1) (1) (1) Net movements on available-for-sale reserve Share of post tax other comprehensive income of associates and joint ventures (10) (10) (10) Tax on other comprehensive income for the year (500) 55 (445) (1) (446) Total comprehensive income for the year (5) 158 Transactions with owners: Non controlling interests in businesses acquired Future dividend obligations to non controlling interests (30) (30) (32) (62) Transfer to special reserve (4) (4) 4 Purchase of non controlling interests (15) (15) Contribution from non controlling interests 3 3 (34) (34) (8) (42) At 31 March ,065 2, , ,340 Owners comprise equity shareholders of the Company and non controlling interests. Source: