* 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, similarly both companies do not recognize revenue from gift cards until merchandise is purchased and the customer redeems the card.
In my opinion, Wal-Mart’s top competitor, Target does a much better job disclosing the methods of revenue recognition in their annual report. Target offers an explanation for the company’s online sales and explains in detail the firm’s policies in regards to expected returns of merchandise. After much analysis of Wal-Mart’s annual report, it was found that the company uses a financial measure, free cash flow, which is considered a non-GAAP financial measure under the SEC’s rules. Free cash flow measures the ability to generate additional cash from business operations and therefore is believed to be an important financial measure to evaluate the business’ financial performance. As stated in the MD&A section of Wal-Mart’s annual report, “Free cash flow should be considered in addition to, rather than as a substitute for, income from continuing operations as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.” There are several methods in calculating a company’s free cash flow; Wal-Mart views this measure as supplemental information to the firm’s entire statement of cash flows. I feel as though the choice to use the measure of free cash flow may seem deceiving and perhaps mislead readers of Wal-Mart’s annual report. Wal-Mart’s free cash flow does not