Franchesca B.

Mendiola February 26, 2018

20160152 Financial Analysis & Reporting

Case 2.3 Walgreen Co. and Subsidiaries

a. Using the Consolidated Balance Sheets for Walgreen Co., prepare a common size balance sheet.

B. The most significant current asset for Walgreen Co. is the inventories. This is because of the nature of the
company which is a retail drugstore business. They need to have the most number of available inventories at all
times in their stores. For non current asset, the most significant is goodwill. Goodwill is an intangible asset that
arises as a result of the acquisition of one company by another for a premium value. This goodwill arises from what
the company calls the “Second Step transaction”. According to the notes of financial statements of Walgreen Co.,
On December 31, 2014, Walgreens Boots Alliance became the successor of Walgreen Co. pursuant to a merger
designed to effect a reorganization of Walgreens into a holding company structure. Pursuant to the Reorganization,
Walgreens became a wholly-owned subsidiary of Walgreens Boots Alliance, a Delaware corporation formed for the
purposes of the Reorganization, and each issued and outstanding share of Walgreens common stock converted on a
one-to-one basis into Walgreens Boots Alliance common stock.
On December 31, 2014, following the completion of the Reorganization, Walgreens Boots Alliance completed the
acquisition of the remaining 55% of Alliance Boots GmbH that Walgreens did not previously own (the “Second
Step Transaction”) in exchange for £3.133 billion in cash and approximately 144.3 million shares of Walgreens
Boots Alliance common stock.
Because of the company acquiring the remaining 55% interest in Alliance Boots, the company’s previously held
45% interest was re-measured to fair value, resulting in a gain of $563 million as of November 30, 2015.

The proportions of current and non-current assets are unlikely you usually expect for a drugstore. Non-current asset
is too large for a retail drug store,which need no large investments in fixed assets (which can be the case for a
manufacturing company) Usually inventories and other current assets are deemed as more than non-current, but
because of the merger that have happened, non-current assets increased in the past years. As of August 31, 2016, the
company has 25.8 billion of goodwill and other intangible assets, most of which relates to the acquisition of Alliance
Boots completed on December 31, 2014. Goodwill, property plant & equipment, and intangible assets are then the
most significant assets we can observe.

C.

The accounts receivable accounts of the company primarily comes from third party providers which are for example
government agencies and insurance companies, as well as clients, members, manufacturers, etc. Charges to bad debt
are based on estimates of recoverability using both historical write-offs and receivables. The allowance for doubtful
accounts for fiscal 2016, 2015 and 2014 was $166 million, $172 million and $173 million, respectively.According to
the information we can see, accounts receivables are less compared to cash and cash equivalents. This can be
because accounts receivable are settled within a at most a week which then settles the accounts right away. The
company probably don’t give much incentives on paying in credit, which is why accounts receivable are low. For
allowance of doubtful accounts, we can see it isn’t that significant, so the company is going well in collecting money
from their receivables.

D. Walgreen Co. Inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method
for the Retail Pharmacy USA segment and on a first-in first-out (“FIFO”) basis for inventory in the Retail Pharmacy
International and Pharmaceutical Wholesale segments except for retail inventory in the Retail Pharmacy
International segment, which is valued using the retail method.
According to the notes,
“The Company’s Retail Pharmacy USA segment inventory is accounted for using the last-in-first-out (“LIFO”)
method. At August 31, 2016 and 2015, Retail Pharmacy USA segment inventories would have been greater by $2.8
billion and $2.5 billion, respectively, if they had been valued on a lower of first-in-first-out (“FIFO”) cost or market
basis. The total carrying value of the segment inventory accounted for under the LIFO method is $6.1 billion and
$5.6 billion at August 31, 2016 and 2015, respectively.”
Therefore, Walgreen experienced deflation or decrease in inventory price levels.
LIFO liquidation is said to occur when a company, using LIFO inventory valuation method, sells its old stock of
inventory. When using LIFO method, it sells or issues, for more than it purchases. This gives a highly distorted or
inflated net operating income resulting in higher tax bill in the current period. When LIFO inventory is liquidated,
the older costs are matched with the current revenues and thus the financial statements show a higher
margin/income,thereby causing a higher tax liability, especially in inflationary periods.

G. No, Walgreen doesn't use off-balance sheet financing in the form of operating leases. As of 2016, total minimum
operating lease payments totaled $34,089 million. This amount is larger than the assets of Walgreen.

H. Looking at the balance sheet, it appears that the Walgreen company may not be creditworthy. Although, not
using Off-balance sheet financing puts Walgreen at a lesser risk. Operating leases are contractual obligations and,
like debt, the firm must be able to make the lease payments or could be forced into bankruptcy. Just by looking at
the balance sheet and notes given, although there aren’t much information about the profitability of the firm and an
assessment of how much cash they generate each year, we can see that it may be at a poor credit risk.