Income Statement Canadian Tire

Document Sample
Income Statement Canadian Tire Powered By Docstoc
					                               [Introduction to Appendix A]

Reading the 2000 Annual Report

The annual report of Canadian Tire Corporation, Limited 1will form the basis of this
comprehensive problem. The annual report of a company informs the reader about the company's
operations over the past year and provides comparative information for at least the prior year.

Canadian Tire comprises three business units: Canadian Tire Retail (CTR), Canadian Tire
Petroleum (“Petroleum”), and Canadian Tire Financial Services (“Financial Services”). Canadian
Tire operates 441 retail stores and 206 gas bars across the country. 38,000 Canadians are
employed by Canadian Tire and the Associate Dealers. In 2000 Canadian Tire was named best
company to work for by Report on Business Magazine. The company is headquartered in
Toronto, Canada. Canadian Tire is a public company incorporated under federal laws. The
company's shares are listed on The Toronto Stock Exchange.

As you, no doubt, already understand, financial statements generally contain a bewildering array
of numbers, and the accompanying notes are often confusing because of the complex and
technical matters with which they are concerned. The ability to understand and interpret financial
statements requires both knowledge and experience, and not surprisingly, some accountants and
security analysts devote their entire attention to this activity. At the same time, it is possible for
shareholders and others who are interested in learning more about a company to obtain a valid
overview of the company's fortunes by spending about 30 minutes studying its financial
statements and notes.

A brief "walk-through" the statements of Canadian Tire should illustrate the point. A logical
starting place is the management report on page 34. Financial statements are the responsibility of
management and this report bears this out. It states that the financial statements of the company
were prepared by management, and the choice of the accounting principles used was theirs as

The Auditors' Report on page 34 is signed by Deloitte & Touche LLP, Chartered Accountants.
One should always read the auditors' report before examining a company's financial statements.
These reports contain important information about the company's financials. The auditors' report
is normally made up of three paragraphs—the introductory paragraph, the scope paragraph and
the opinion paragraph. The introductory paragraph identifies the statements, explains
management’s responsibility as well as that of the auditor. The scope paragraph provides a
description of the work of the audit and reference to generally accepted auditing standards. The
opinion paragraph provides the auditor’s conclusions about the statements.

The opinion presented in the Canadian Tire report is an unqualified opinion. It states that the
statements present fairly and in conformity with GAAP, and that accounting principles were
applied consistently.

Next, turn to page 38 to read Note 1 entitled "Significant accounting policies." Accounting
principles are prescribed by the CICA. However, there is considerable room for judgement in
how these principles should be applied. Since the policies followed by the corporate entity affect
    Canadian Tire Corporation, Limited will be referred to as Canadian Tire.
the financial statements, it is important to know which ones have been applied. As a minimum,
this summary should describe Canadian Tire's policy whenever a selection has been made from
alternative, acceptable accounting principles, methods, and procedures. Thus, this note describes
how Canadian Tire accounts for such items as revenue recognition, inventories, property, plant,
and equipment, and related depreciation. At this point, it is sufficient to note that the disclosure
of accounting policies informs the reader about the "hows" on which the financials are based.

Notes to the financial statements are an integral part of the statements and should be read in
conjunction with them. They are an important part of the statement and are necessary for an
accurate interpretation of the information contained in the statements. They explain the numbers
that appear in the financials. The notes should also be carefully checked for any changes in the
application of accounting principles.

The Consolidated Statement of Earnings and Retained Earnings on page 35 merits careful study.
In fact, this is probably the single most important of the group of statements. It summarizes the
results of operations for the year ended December 30, 2000, together with comparative figures for
the year immediately preceding. The word "consolidated" in the statement title is explained by
the company in Note 1 on page 38 as follows:

           The consolidated financial statements include the accounts
           of Canadian Tire Corporation, Limited and its subsidiaries.

Presentation of the data for at least two years is important, because it gives the reader an added
perspective in evaluating current performance.

The reader should be particularly alert to the nature and significance of any items reported as
extraordinary. Since these items are essentially of a non-operating and non-recurring nature,
many users of financial statements attach particular importance to earnings (losses) before
extraordinary items as a measurement of operating results. There are no extraordinary items in the
statements for Canadian Tire for the year ended December 30, 2000.

Canadian Tire presents basic earnings-per-share of $1.89. The basic earnings per share was
obtained by dividing the $148,022 profit for the year by the weighted average number of the
company's shares outstanding. Earnings per share is the single most important figure in the
annual report. It is among the financial measures most commonly quoted in the business and
financial press.

The Consolidated Statement of Retained Earnings connects the income statement to the
Consolidated Balance Sheet. It indicates the change in the earnings retained in the business from
last year to this year. In the year ended December 30, 2000 dividends in the amount of $31,328
were paid to shareholders. The profit shown on the Consolidated Statement of Earnings is carried
forward to the Consolidated Statement of Retained Earnings and the balance of the Consolidated
Retained Earnings is then carried forward to the Consolidated Balance Sheet.

Canadian Tire's Consolidated Balance Sheet, in comparative form, appears on page 37. It
presents the company's financial position as at specific points in time indicated by the dates
applicable to the statements. Thus, a balance sheet is analogous to a snapshot. In accordance with
generally accepted accounting principles, it reports the assets owned, the liabilities owed to
outsiders, and, as shareholders' equity, the stake of the company's owners, the shareholders.
From the viewpoint of the reader, it is most important to note that a balance sheet reports
accounting values that bear no necessary relationship to economic or market values. This
important point is a common misconception that is held by numerous users of financial

If we examine some of the assets listed on Canadian Tire’s balance sheet, we can see that the
items are listed at very different valuations:

                Cash and Accounts Receivable—held at current dollars.
                Inventories—held at the lower of estimated cost and estimated
                net realizable value, with cost being determined on a first-in, first-out basis. (As
        per Note 1 on page 38.)
                Property, Plant and Equipment—balance of original cost less

The Consolidated Statement of Cash Flow’s objective is to provide information about the
operating, financing, and investing activities of an enterprise and the effects of these activities on
cash. It summarizes the effects of various business activities on the cash resources. In simple
terms, this statement shows where the cash has come from and where it has gone.

The purpose of the Cash Flow Statement is to answer questions such as:

1. Do normal operations generate sufficient cash to enable the continued payment of

2.   Did the business have to borrow cash to finance the purchase of new plant assets, or was it
     able to generate the cash from current operations?

3.   Is the business becoming more or less solvent?

This brief "walk-through" is something more than an easy stroll. Hopefully, it conveys important
points about financial statements. They can be informative and do not defy informed reading.

Description: Income Statement Canadian Tire document sample