* Step one: Identify Potential Red Flags
After analyzing Wal-Mart’s annual report for 2010, attention has been brought to several items that require closer examination. A common “red flag” to questionable accounting has been found within Wal-Mart’s statement of cash flows and income statement. There is an increasing gap between the company’s reported income and the cash flow from operating activities. In the year 2008 reported income and cash flow from operating activities differed by $484 million. However the difference increased a considerable $2,249 and $4,183 billion in the years 2009 and 2010 respectively. This increasing gap is a significant warning sign that the company may be changing accrual estimates.
Another factor to…show more content… However, since Wal-Mart is a discount retailer, it has proven favorable for the company to use the retail method of accounting. Under this method the inventory is valued at the lower of cost or market since markdowns are currently taken as a reduction of the retail value of inventory.
Wal-Mart recognizes revenues at the time the sale is made to the customer. Wal-Mart’s method of accounting for revenues differs from its competitor, Target in some instances. For example, Target does not include sales tax in total revenues; whereas Wal-Mart