Problem(s)

Problem 1: Lowes Companies

On the pages following the questions below, we provide the Financial Statements for Lowes Companies,
for the period ended January 31, 2003. Using this information, answer the following questions about
Lowes.

A. We will begin with Lowes balance sheet (BS). This statement shows the assets, liabilities and
shareholders equity of the enterprise.

1. Assets are defined in accounting as future economic benefits controlled by an enterprise because
of a past event or transaction.
a. What were Lowes total assets as of January 31, 2003? What is the largest category of asset
(in dollar value) as of January 31, 2003?
b. Confirm that total current assets as of January 31, 2003 is $5,568 by adding up all the items
listed as current assets.
c. Confirm that total assets as of January 31, 2003 is $16,109 by adding up all the items listed as
assets.

2. Liabilities are defined in accounting as obligations to make future economic sacrifices because of
a past event or transaction. Sometimes obligation is used synonymously with liability.
a. What were Lowes current liabilities as of January 31, 2003?
b. What were Lowe's long term liabilities as of January 31, 2003?
c. Confirm that total current liabilities as of January 31, 2003 is $3,578 by adding up all the
items listed as current liabilities.
d. Confirm that total liabilities as of January 31, 2003 is $7,807 by adding up all the items listed
as liabilities.

3. Shareholders equity (also sometimes called stockholders equity, book value of equity or net
worth) in accounting is the difference between assets and liabilities. It is composed of stock and
retained earnings (the latter is called accumulated deficit when its value is negative).
a. Using the numbers on Lowes balance sheet for 2003, show that the balance sheet equation
works. That is, Assets Liabilities = Shareholders equity. Do the same calculation for 2002.
b. How many shares of Lowes common stock were outstanding as of January 31, 2003? How
many were outstanding as of February 1, 2002? What does the difference between these two
numbers indicate Lowes did during 2003?
c. What dollar value is reported for these outstanding shares in Lowes balance sheet?
d. Retained earnings means that Lowe has, since its inception, had more net profits in total than
it has had net losses. How large is Lowes retained earnings as of January 31, 2003 and as of
February 1, 2002?
e. What was the change in Lowe's retained earnings between February 1, 2002 and January 31,
2003?

4. In accounting, current assets and current liabilities refer to items of a short-term nature (usually
one-year or less). One conventional measure that is often used to measure a firms ability to meet
its short term obligations is the current ratio, which is current assets divided by current liabilities.
What is Lowes current ratio as of January 31, 2003? As of February 1, 2002? Based on the
change in this ratio, has Lowes ability to meet its short term obligations improved or
deteriorated?

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B. Next we turn to Lowes income statement (IS).

5. What was Lowes net income or net loss in fiscal period ending 2001, 2002 and 2003?

6. What was Lowes largest expense item in fiscal period ending 2003? 2002?

7. Gross margin (or sometimes called gross profit) is sales revenues less cost of goods and services.
What was Lowes gross profit in fiscal period ending 2003? 2002? Why might an investor want
to know this number? That is, what does it tell you?

8. Depreciation expense refers to the periodic write down of a long lived asset to reflect its use. A
common way to determine the amount to write down is to divide the assets cost (adjusted for any
expected salvage value) by the assets expected useful life. We use the term amortization expense
to refer to the same construct, but applied to intangible assets such as patents and trademarks.

What was Lowes depreciation expense in fiscal period ending 2003? 2002?

C. Now turn to Lowes statement of shareholders equity (SSE). This statement details what happened to
each of the equity accounts during the period.

9. Does Lowes pay dividends? How much did they pay in fiscal period ending 2003? 2002?

10. Using the comparative balance sheet and income statements for January 31, 2003 and February 1,
2002, calculate Lowes retained earnings balance at the end of January 31, 2003 using the
following expression: Retained earnings at the end of year t-1 + Net income for year t - Dividends
for year t = Retained earnings at the end of t. Aside: If we can calculate net income (or net loss)
using balance sheet and dividend information, why do we need an income statement?

11. We know from question 3.b that Lowes increased the number of shares outstanding during fiscal
period ending 2003. What does the SSE tell you about the type of transactions that gave rise to
this increase?

D. Finally, we examine Lowes statement of cash flows (SCF).

12. How much cash did Lowes provide (or use) in operations in fiscal period ending 2001, 2002 and
2003?

13. Did Lowes add to its long lived assets during fiscal period ending 2003 or reduce them? What
part of the statement of cash flows helps you answer this question?

14. On net, did Lowes support its growth in fiscal period ending 2003 by borrowings or by funds
from operations? How can you tell, again, from the statement of cash flows?

15. Verify that the sum of cash flows from operations, investing and financing, per the statement of
cash flows, equals the change in cash per the balance sheet accounts for fiscal period ending 2002
and 2003.

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Solution:

A. 1. a. 16,109; Property, Less Accumulated Depreciation (64%)

b. 853+273+172+3,968+58+244 = 5,568
c. 853+273+172+3,968+58+244+10,352+29+160 = 16,109

2. a. 3,578
b. 3,736+478+15 = 4,229
c. 50+29+1,943+88+306+1,162 = 3,578
d. 50+29+1,943+88+306+1,162+3,736+478+15 = 7,807

3. a. 2003: 16,109 7,807 = 8,302

2002: 13,736 7,062 = 6,674
b. 2003: 782 million
2002: 776 million
Lowes issued more stock
c. 2003: 391 + 2,023 = 2,414
2002: 388 + 1,803 = 2,191 (Common Stock + Capital in Excess of Par)
d. 2003: 5,887
2002: 4,482
e. 5,887 4,482 = 1,405

4. 2003: 5,568 / 3,578 = 1.56

2002: 4,920 / 3,017 = 1.63
Lowes ability to meet short-term obligations has deteriorated.

B. 5. 2003: 1,471; 2002: 1,023; 2001: 810

6. 2003 & 2002: Cost of Sales
7. 2003: 8,026; 2002: 6,368; Gross margin measures a firms efficiency in producing and/or
distributing its products and/or services.
8. 2003: 626; 2002: 517

C. 9. Yes; 2003: 66; 2002: 60

10. 4,482 + 1,471 66 = 5,887; The income statement helps in identifying the components of net
income.
11. Employee Stock Option Exercise; Stock Issued to ESOP; Employee Stock Purchase Plan

D. 12. 2003: 2,696 provided; 2002: 1,613 provided; 2001: 1,130 provided
13. Lowes added to long-lived assets; Fixed Assets Acquired shows (2,362). See Cash Flows from
Investing Activities.
14. Funds from operations. Note that Net Cash Provided by Operating Activities is greater than Net
Cash Used in Investing Activities (2,696 > 2,578). Also, note that there were no Long-Term Debt
Borrowings in 2003.
15. 2003: 2,696 2,578 64 = 54; 2002: 1,613 2,199 +929 = 343

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