Adjusted financial statements as a prelude to the

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Adjusted financial statements As a prelude to the analysis process, we analyze current and prior years' financial statements to be sure that they accurately reflect the company's financial condition and operating performance. Why? The answer resides in the fact that r general-purpose financial statements prepared in conformity with GAAP do not always accu- rately reflect our estimate of the "true" financial condition and operating performance of the company. Accordingly, before we begin the analysis process, we analyze historical financial statements to be sure they reflect our estimate of the "true" financial condition of the company and consider adjustments when those reports are inconsistent with reality. Later modules assess BUSINESS INSIGHT Prior to its ratio analysis, S&P adjusts companies' balance sheets and income statements for the following: Operating leases Take-or-pay contracts Debt of joint ventures and unconsolidated subsidiaries Factored, transferred, or securitized receivables Financial guarantees Contingent liabilities The table below shows some of the adjusted numbers S&P used for its credit analysis of Home Depot in 2010. For example, see that S&P adjusts Debt (column 1) to include $4,961 million of operating leases and $940.6 of other items including pension related obligations. We consider these topics in Module 9. Reconciliation of Home Depot Reported Amounts with Standard & Poor's Adjusted Amounts Fiscal year ended Jan. 31, 2010 Operating Operating Operating income income income Cash Cash (before (before (after Interest flow from flow from Capital $ millions Debt D&A) D&A) D&A) expense operations operations expenditures Reported ............... 9,682.0 6,656.0 6,656.0 4,949.0 676.0 5,125.0 5,125.0 966.0 Standard & Poor's adjustments Operating leases ........ 4,961.0 803.0 418.9 418.9 418.9 384.1 384.1 448.7 Additional items included in debt ....... 940.6 Capitalized interest. ..•... 4.0 (4.0) (4.0) (4.0) Share-based compensation expense .. 201.0 Reclassification of nonoperating income (expenses) ............ 18.0 Reclassification of working-capital cash (521.0) flow changes .......... Total adjustments ........ 5,901.6 803.0 619.9 436.9 422.9 380.1 (140.9) 444.7 Standard & Poor's adjusted amounts' ..... 15,583.6 7,459.0 7,275.9 5,385.9 1,098.9 5,505.1 4,984.1 1,410.7 [Operating [EBITDA)' IEBIT} [Cash flow from IFunds from income before operations]* operations], D&A)' • Home Depot Inc. reported amounts are taken from financial statements but might include adjustments made by data providers or reclassifications made by Standard & Poor's analysts. Two reported amounts (operating income before D&A and cash flow from operations are used to derive more than one Standard & Poor's-adjusted amount (Operating income before D&A and EBITDA, and Cash flow from operations and Funds from operations, respectively). Consequently, the first section in some tables may feature duplicate descriptions and amounts
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Module 4 I Credit Risk Analysis and Interpretation 4-12 accounting and measurement of assets and liabilities, from which we will be able to make ed judgments about the adjustments necessary to reflect the true financial condition and ormance of the company.' ability analysis Profitability is related to credit risk because firms wish to pay inter- and repay their debt with cash generated from profits. The more profitable the firm, the
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