Response to the following problem:
The following operating data (in millions) were adapted from the SEC 10-K filings of Walgreens and CVS:3
|
CVS
|
Walgreens |
|
|
2010
|
2009
|
2010
|
2009
|
|
Accounts receivable
|
$5,436
|
$5,963
|
$2,450
|
$2,496
|
|
Accounts payable
|
7,096
|
6,806
|
7,421
|
6,754
|
1. Using the preceding data, adjust the operating income for CVS and Walgreens to an adjusted cash basis. For 2010, the operating income for CVS was $3,439 and for Walgreens it was $2,091 (in millions). (Hint: To convert to a cash basis, you need to compute the change in each accrual accounting item shown and then either add or subtract the change to determine the operating income.)
2. Compute the net difference between the operating income under the accrual and cash bases.
3. Express the net difference in (2) as a percentage of operating income under the accrual basis.
4. Which company's operating income, CVS's or Walgreens', is closer to the cash basis? Round to one decimal place.
5. Do you think most analysts focus on operating income or net income in assessing the long-term profitability of a company? Explain.