Because it is always tax time and Jackson Hewitt tax services franchises are som
ID: 2337541 • Letter: B
Question
Because it is always tax time and Jackson Hewitt tax services franchises are sometimes located in Wal-Mart stores, let’s analyze something of Wal-Mart’s. The Wal-Mart 2017 income statement is above. Answer the following questions pertaining to it.
a) Wal-mart reports two different earnings per share amounts for each, basic and diluted. It also separates each of those for 2015 for continuing and discontinued operations. Your boss at work asks you to explain this (if you are self-employed, pretend). Help your boss understand the meaning and differences between basic and diluted EPS and continuing and discontinued operations.
b) The income statement also shows different numbers for weighted average common shares outstanding for basic and diluted EPS. Give two examples (specificity preferred) of what can cause this difference.
c) The income statement also shows a “provision for income taxes” and something called “Income from discontinued operations, net of income taxes.” Explain why there are two separate lines with the phrase income
Fiscal Years Ended January 31 (Amounts in millions, except per share data) Revenues: 2017 2016 2015 Net sales Membership and other income Total revenues Costs and expenses: $481,317 $478,614 $482,229 3,422 485,651 4,556 485,873 3,516 482,130 Cost of sales Operating, selling, general and administrative expenses Operating income Interest 361,256 101,853 360,984 97,041 24,105 365,086 93,418 27,147 22,764 2,044 323 (100) 2,267 20,497 6,204 14,293 Debt 2,027 521 (81) 2,161 300 (113) 2,348 24,799 7,985 16,814 285 Capital lease and financing obligations Interest income 2,467 21,638 6,558 15,080 Interest, net Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income from discontinued operations, net of income taxes Consolidated net income Consolidated net income attributable to noncontrolling interest Consolidated net income attributable to Walmart 15,080 (386) 13,643 14,694 14,293 (650) 17,099 (736) 16,363 Basic net income per common share Basic income per common share from continuing operations attributable to Walmart Basic income per common share from discontinued operations attributable to Walmart $4.40 4.58 5.01 0.06 Basic net income per common share attributable to Walmart Diluted net income per common share: $4.40 4.585.07 Diluted income per common share from continuing operations attributable to Walmart Diluted income per common share from discontinued operations attributable to Walmart $4.38 4574.99 0.06 Diluted net income per common share attributable to Walmart 4.38 457 5.05 Weighted-average common shares outstanding 3,207 3,217 $2.00 1.96 3,101 3,112 3,230 3,243 1.92 Basic Diluted Dividends declared per common share notesExplanation / Answer
1. Meaning and Difference between Basic & Diluted EPS & continuing and discontinued operations
(a) Basic EPS is the amount of company's profit or loss for a reporting period that is available to its shareholders during the reporting period. The same is calculated by dividing Net Income with Shares outstanding at the end of the reporting period. However, Preferred Dividend and Income tax is subtracted from Net Income for the purpose of calculating Basic EPS. On the other hand, Diluted EPS is calculated to guage the quality of company's EPS if all convertible securities, for eg. outstanding convertible preferred shares, convertible debentures, stock options, and warrents are exercised. To calculate diluted EPS, we simply modify the share count in the EPS formula to account for the extra shares. The basic difference between basic and diluted EPS is that in Diluted EPS it is assumed that all the convertible securities will be exercised. Unlike Diluted EPS, basic EPS does not take into account any dilutive effects that convertible securities have on its EPS.
(b) The company accounts for its Income from regular, daily business activities, referring to the tasks required to make a product or service and deliver it to a customer under the net income from Continuing Operations Category found in the Income Statement. On the other hand, Discontinued Operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed off. Discontinued operations are listed separately on the Income Statement from Continuing Operations, so stakeholders can distinguish the profit and cash flows from continuing operations from activities that have ceased.
2. Two examples that can result in different numbers for weighted average common shares outstanding for basic and diluted EPS
Basic Earning Per Share is calculated to now earning available to each equity shares. It is calculated by considering company's ordinary shares. On the other hand, diluted earnings per share is calculated when there are potential shares, i.e., convertible securities, in the company's financial structure. Therefore, the company must be having convertible securities like, (a) Outstanding convertible preferred stock, (b) Convertible Debt, (c) warrants, (d) Outstanding stock options, due to which weighted average number of shares for basic and diluted EPS are different.
3. Why two separate line with phrase Income
As explained above, Income from continuing operations are from daily routine activities of the company from tasks required to make a product or service and deliver it to customers. On the other hand, Discontinued Operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed off. Income from discontinued operations are reported as separate line item in income statement and are reported net off taxes. The income from discontinued operations are not included in income from continuing operations. The provision for income tax pertains to tax on Income from continuing operations and does not include taxes on Income from discontinued opeartions. However, Income from discontinued operations is a separate line item on an income statement of a company below income from continuing operations and before Net Income. It represents the after tax effect of the operations of the discontinued segment for the period.