Compute the operating income under accrual and cash bases

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Reference no: EM13899955

The following operating data (in thousands) were adapted from the 2004 SEC 10-K filings of Walgreen and CVS:

	CVS		Walgreen
	2004	2003	2004	2003
Accounts receivable	$2,007,300	$1,601,700	$1,169,100	$1,017,800
Accounts payable	3,942,600	3,166,000	4,077,900	3,420,500

1. Using the preceding data, adjust the operating income for CVS and Walgreen shown in Case 3-1 to an adjusted cash basis. (Hint: To convert to a cash basis, you need to compute the change in each accrual accounting item shown on preceding page and then either add or subtract the change to the operating income.)

2. Compute the net difference between the operating income under the accrual and cash bases.

3. Express the net difference in (2) as a percent of operating income under the accrual basis.

4. Which company's operating income, CVS's or Walgreen's, is closer to the cash basis?

5. Do you think most analysts focus on operating income or net income in assessing the long-term profitability of a company? Explain.

Reference no: EM13899955

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