Question

Lowe's Companies, Inc.	Dollar amounts in Millions
Common-Size Balance Sheets	Feb. 01, 2019	Feb. 02, 2018
Current assets:
Cash and cash equivalents	$ 511	$ 588
Short-term investments	218	102
Merchandise inventory - net	12,561	11,393
Other current assets	938	689
Total current assets	14,228	12,772
Property, less accumulated depreciation	18,432	19,721
Long-term investments	256	408
Deferred income taxes - net	294	168
Goodwill	303	1,307
Other assets	995	915
Total assets	34,508	35,291
Current liabilities:
Short-term borrowings	722	1,137
Current maturities of long-term debt	1,110	294
Accounts payable	8,279	6,590
Accrued compensation and employee benefits	662	747
Deferred revenue	1,299	1,378
Other current liabilities	2,425	1,950
Total current liabilities	14,497	12,096
Long-term debt, excluding current maturities	14,391	15,564
Deferred revenue - extended protection plans	827	803
Other liabilities	1,149	955
Total liabilities	30,864	29,418
Shareholders’ equity:
Preferred stock - $5 par value, none issued	0	0
Common stock - $.50 par value; Shares issued and outstanding 801 at February 1, 2019 and 830 at February 2, 2018, respectively	401	415
Capital in excess of par value	0	22
Retained earnings	3,452	5,425
Accumulated other comprehensive income/(loss)	(209)	11
Total shareholders’ equity	3,644	5,873
Total liabilities and shareholders’ equity	$ 34,508	$ 35,291

a. Identify the current operating liabilities (only include liabilities that will impact operating expenses) for each company and the applicable common-size percentage for each operating liability in the current year using your common-size balance sheet from part 2 of the financial analysis case. Explain why you picked these as the current operating liabilities. Operating liabilities are discussed in Module 4, but relates to module 7 with the continuation of the discussion on liabilities.

b. Identify the largest current operating liability for each company and explain why this current operating liability is so large compared to the other current operating liabilities.

c. What current liabilities did you not include in your analysis of current operating liabilities? Make sure you list out each of the current liabilities that were not included in “a”. Explain why you did not include them.

Answer 1

(a): For Lowe’s Companies the current operating liabilities are accounts payable, accrued compensation and employee benefits, and other current liabilities.

The applicable common-size percentage for these current operating liabilities is shown below:

	2019	2018
Accounts payable	23.99%	18.67%
Accrued compensation and employee benefits	1.92%	2.12%
Other current liabilities	7.03%	5.53%

The percentages are computed using the total asset amount as base for each year.

The reason for picking these assets as current operating liability is that these liabilities are resulting directly from Lowe's primary operations.

(b): The largest current operating liability for Lowe’s for both 2019 and 2018 was accounts payable. The reason why this is the largest current operating liability is that this account shows the amount of money the company owes to its vendors. It is a crucial part of Lowe's working capital and because the organization has a large quantum of purchases and because a significant proportion of these purchases are on credit the accounts payable is so large for the company. In other words accounts payable is highly related to the company’s operations and this is the reason why accounts payable is so large when compared to the other current operating liabilities.

(c ): The current liabilities that I have not included are – short term borrowings, current maturities of long term debt and deferred revenue. The reason for not including them is based on accounting rational and principles. Short term debt and current installments of long-term debt are excluded because they are interest bearing in nature. It should be noted that current operating liabilities exclude any current loans or interest bearing liabilities. Deferred revenue is excluded because it is just the revenue which has been received in advance and so is not directly impacting Lowe’s operations for the year.