Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 3 Accrual Accounting Concepts 145

Home DepotandLowe’soperate national chains of home improvement stores that sell a wide

assortment of building materials and home improvement, lawn, and garden products, such as

lumber, paint, wall coverings, lawn mowers, plumbing, and electrical supplies. Home Depot op-

erates approximately 1,707 stores, while Lowe’s operates approximately 952 stores. The follow-

ing operating data (in millions) were adapted from the 2004 SEC 10-K filings of Home Depot

and Lowe’s:

1. Prepare common-sized income statements for Home Depot and Lowe’s.


2. Compute the average sales per store for Home Depot and Lowe’s. Round to the thousands.


3. Analyze and comment on your results in (1) and (2).


4. Broker recommendations are reported on Yahoo.com’s financial Web site. The recommen-
   dations are ranked as follows:

Strong Buy 1

Buy 2

Hold 3

Sell 4

Strong Sell 5

Based upon your answer to (3), would you expect the average broker recommendation for

Home Depot to be higher (less favorable) or lower (more favorable) than for Lowe’s? Compare

your assessment with the average broker recommendation on Yahoo.com’s financial Web

site (http://finance.yahoo.com/). To find the broker recommendation, enter thestock symbols

for Home Depot (HD) and Lowe’s (LOW) and click on “research.”

Comparative income statements for two video game developers, Activision, Inc., and Electronic

Arts, Inc., are provided for a recent fiscal year as follows:

Case 3-6

Analysis of income statements

Case 3-7

Common-sized statements

Home Depot Lowe’s

Net sales $64,816 $30,838

Cost of sales 44,236 21,231

Gross profit $20,580 $ 9,607

Operating expenses 13,734 6,429

Operating income $ 6,846 $ 3,178

Interest expense 62 180

Other income 59 15

Income before taxes $ 6,843 $ 3,013

Income taxes 2,539 1,136

Net income $ 4,304 $ 1,877

Activision Electronic Arts

Net revenues $680,094 $2,957,141

Cost of goods sold 397,292 1,102,950

Gross profit $282,802 $1,854,191

Sales and marketing expenses $105,248 $ 370,468

General and administrative expenses 15,407 184,825

Product development expense 25,068 510,858

Other expenses 0 12,443

Operating income $137,079 $ 775,597