Posts Tagged retail

Understanding Accounting

Posted by on Wednesday, 13 October, 2010

Today I remembered two articles that showed me a different way to view two different subjects. The first article, by Paul Graham, is about the true history of the essay. The second article is known as Lockhart’s Lament and is about math education. So I wondered whether accounting education could use a similar article.

I remember giving a speech in my marketing capstone class that helped my fellow students understand financial statements. Financial statements tend to be very dry and involve a lot of mathematical calculations. I brought up some of the liquidity ratios, such as the acid test and working capital. These topics seem arcane to other students, so it’s a lot easier to explain them as part of a story.

The acid test is basically short term assets, not including inventory, divided by short term liabilities. The point of this test is to show the amount of money that the company can raise by selling everything it owns, although the test includes the condition that the company also has to pay off all of the debt that it must pay in the near future. So the acid test basically tells a story. Each year the company releases a financial statement, an investment analyst can calculate the acid test. If it’s 2 one year, 1.5 the next year, and 1.3 the next year, the analyst can see that the firm is clearly in trouble. Once this ratio goes below 1.0, the company is technically insolvent, since its creditors can demand more money than it can pay by selling off its assets at any given time.

The other ratios also tell a story. Inventory turnover is the cost of items in inventory sold, divided by the average value of inventory. Using this number, a firm can determine how many days it normally takes the company to sell off its current inventory, by dividing the 365 days in the year by the inventory turnover number. As with the acid test, an investment analyst can see a trend forming. If the company takes 60 days to sell a full lot of inventory one year, then 90 days, then 120 days, the company is having trouble finding customers. It’s necessary to compare financial statements from separate years to see how well the company is doing.

Understanding how these ratios operate also allows an investment analyst, a private investor, or a company accountant to detect fraud. Overvaluing inventory creates a consistent pattern which affects several other accounts. One of the most common types of fraud is to report an asset as inventory instead of as an expense. If the company performs well next quarter, it is simple to eliminate the asset and report an expense next quarter, without greatly affecting performance statistics.

This type of fraud can change a loss in one quarter into a profit, providing a psychological boost, while only slightly reducing the profit the company reports the next quarter. A retail store, such as a mall clothing store, expects that customers will return a certain amount of clothing each quarter, and the store will have to refund the purchase price to the customers, so it establishes a return allowance in its accounts. A manager can reduce the return allowance to ensure that the store remains profitable for a quarter, and then reverse the change during a busier quarter when the store should sell more clothing, such as the winter holiday season.

Big Box Retailers and Solar Power Generation

Posted by on Thursday, 10 June, 2010

Researching the Solana plant led me to a Senate report on solar power generation. Big box retailers such as Walmart, Target, and Best Buy have huge stores, many of which are located in the hot Southwest. Some of these stores have large quantities of food which must be refrigerated, and they may also air condition their stores for customer comfort. This requires a lot of power, and the 2008 gasoline price spike scared a lot of companies into setting up their own renewable power generation systems. The big box stores are now installing their own solar photovoltaic equipment.

Walmart has installed a large solar array at its location in Apple Valley. This project now provides 1 megawatt of solar power to run the Apple Valley Walmart. It’s part of a larger Walmart initiative, Walmart already set up 18 solar arrays at stores in California and plans to have as many as 40 arrays complete in California locations by the end of 2010. These arrays are intended to provide about a quarter of the power that a store uses, and Walmart claims that its goal is to eventually switch fully to renewable power sources.

Many of the big box chains also sell solar panels and control equipment. Chains that focus on electronics and related equipment, such as Fry’s Electronics, have the best selections of solar gear. Larger store chains like Costco and Walmart that sell pretty much anything also sell solar power setups. Rebates on this equipment may be available as well.

Costco is also installing large photovoltaic systems at its own store locations. One of the biggest installations is at a Costco in New Jersey. Solar Power, Inc performed this installation, with solar panels manufactured by the Bay Area firm Solyndra. Solyndra and Solar Power, Inc won an award from Renewable Energy World for the successful completion of this project. The Solyndra solar collectors include significant technological breakthroughs since the cylinders in the panel can collect solar rays from any direction, providing efficiency improvements. President Obama and Senator Barbara Boxer have toured Solyndra’s Fremont solar panel factory, and Solyndra has received federal loan guarantees to continue solar panel construction.

Target is another large big box store that sells solar panels and other appliances which can be recharged by the sun. Some Target stores also have their own solar installations now. According to Target, the company has 21 stores in California with solar power systems installed and plans to add more. The company mentions that earlier stores may not be designed for solar panel installation on their roofs, although new roofs can incorporate this goal.