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Acc 529 - Equity, Cash Flow, and Notes Analysis Paper - Accounting for Managerial Decision Making

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Equity, Cash Flow, and Notes Analysis Paper


Accounting for Managerial Decision Making

Cynthia Law

Scott Law

Sunny Lee

Samuel Ogunwobi

Clara Reid

Professor James Neuner

January 19, 2004

Table of Contents

Table of Contents 2

Introduction 3

Consolidated Statements of Shareholders' Equity 3

Consolidated Statements of Cash Flows 4

Goals of the Organization 5

Important notes to the financial statements 6

Management's Discussion and Analysis of Operations 9

Conclusion 10

Table 1 11

Table 2 12

Table 3 ................................................................................................13

References 14


Kmart remains one of the largest retail stores in America that must be recognized with strong financial statement and balance sheet. In accounting, balance sheets and financial statements mean a lot to a financial organization and investors. The financial support provided to any corporate or organization is based on its ability to justify its need with strong assets, cash flow and owner's equity. A financial organization and investors look at these tools to determine the viability of a business. As described by Kmart President and CEO Julian Day, Kmart continues to make good in improving profitability of the company. ( Different accounting equations such as net income, assets, owner's equity, account receivables and current ratio define profitability. Using different scenarios applicable to Kmart, Team A reviewed the financial and cash flow statements of fiscal years 2002 & 2003. Company data is compared and analyzed to develop realistic company goals. The information used by investors to make good decisions is the significance of current ratios, accounts receivable turnovers and other accounting components.

Consolidated Statements of Shareholders' Equity

In the Abbreviated Statement of Shareholders' Equity (Table 1), it is obvious that Kmart is going through Chapter 11 bankruptcy proceedings and emerges from those proceedings as a viable organization. Beginning on January 30, 2002, Kmart had a positive equity statement. From that point, they experienced significant comprehensive losses that took them into a negative equity stance. The three line items that compromised the total comprehensive losses in Fiscal Year 2002 were Net losses of $3219 million, Pension adjustments of $554 and Market adjustments for investments of $1 million. These losses resulted in a net balance at the end of Fiscal Year 2002 of negative $302 million. In the next four months ending just prior to the reorganization of the entity (Predecessor Company) were Net losses of $855 million and a positive return of $259 million in conversion of preferred securities.

At reorganization, the Shareholders' Equity equaled negative $991 million and all positive equity was sold and all other liabilities were balanced out to a zero balance. The capital of $1713 million brought into the new entity (the Successor Company) began the documenting of a positive balance for the Successor Company. Since that time, April 30, 2003, Kmart has documented a positive balance on the Statements of Shareholders' Equity. They added $248 million in Net income, $1 million in Market value adjustments, $233 million in tax settlements and $1 million in other equity additions. A purchase of $4 million in Treasury stock was the only subtraction from the equity of the shareholders.

Consolidated Statements of Cash Flows

The Statements of Cash Flows (Table 2) also demonstrates Kmart's entering into and emerging from bankruptcy proceedings. This statement documents all the positive and negative adjustments to the cash flow of the entity. The corporation remained with a positive Cash Flow for all Fiscal Years leading up to restructuring. Although Kmart had positive cash flows, the amount of available cash was minimal and was not close to covering the negative equity in the corporation. This balance discrepancy mandated restructuring for the entity to remain solvent.

One of the largest positive influxes to the corporation in regards to cash flows was a dramatic change in merchandise inventories. In Fiscal Year 2002, this was listed as negative cash flows of $168 million. The periods ending on April 30, 2003 and January 28, 2004 saw positive inventory amounts of $480 million and $1193 million, respectively. Although this is merchandise that remains on the shelf, this accounted for a significant amount of the cash flows from operative activities.

Two other positive cash flow items were proceeds from property and equipment sales and proceeds from the issuance of stock. These two items accounted for $322 million in positive cash flow and greatly assisted the entity in establishing itself as a solvent organization.

Goals of the Organization

In the letter to the shareholders, Kmart Chairman Edward Lampert and President and CEO of Kmart Julian Day established other goals of the organization: "to focus our initiatives, merchandise assortment and associate goals on the four key areas of stores, markets, customers and profitability" ( After Mr. Lambert took control after Chapter 11 proceedings, Kmart slashed inventory, squelched capital spending, reorganized the overall organization, and sold Kmart's best locations for the cash to maximize profitability (

Stigmas associated with Chapter 11 can be very difficult for a company to overcome. Investors have doubts about the ability of the organization to turn around bad fortunes, customers wonder if the service issues that drove them away are going to change, vendors may question if their merchandise will sell after the reorganization. Employees also have significant and very real concerns about



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