Busn 233 CH 02

Financial Statements:
Balance Sheet
Income Statement
The basic difference between accounting value (or book value) and market value
The difference between accounting income and cash flow
How to determine a firms cash flow from its financial statements
Calculate cash flow
The difference between average and marginal tax rates
Calculate taxes
Financial Statements:
Balance Sheet
Income Statement
The basic difference between accounting value (or book value) and market value
The difference between accounting income and cash flow
How to determine a firms cash flow from its financial statements
Calculate cash flow
The difference between average and marginal tax rates
Calculate taxes
Assumptions
Year 1 12/31/2006
Year 2 12/31/2007
Company Name RAD Corporation
Shares outstanding (in 000,000), Dec 31, 2007 210
Balance Sheet is a snapshot of the account balances on the last day of the period
Assets = Liabilities + Shareholders' Equity
RAD Corporation
Balance Sheet ($ in Millions)
Balance Sheet as of December 31, 2006 and 2007
Assets Liabilities and Shareholders' Equity
2006 2007
Current assets Current Liabilities
Cash $119 $183 Accounts Payable
Accounts Receivable 465 698 Notes Payable
Inventory 563 565 Total
Total $1,147 $1,446
Fixed Assets Long-term debt
Net Fixed Assets 1,654 1,719 Total Liabilities
Shareholders' Equity
Common Stock and paid-in surplus
Retained Earnings
Total
Total Assets $2,801 $3,165 Total Liabilities and Shareholders' Equity
Why is this called the balance sheet?
RAD Corporation
Liabilities and Shareholders' Equity
2006 2007
$237 $278
206 133
$443 $411
418 464
$861 $875
610 638
1,330 1,652
$1,940 $2,290
$2,801 $3,165
RAD Corporation
2006 2007
Current assets Current Liabilities
Cash $119 $183 Accounts Payable
Accounts Receivable 465 698 Notes Payable
Inventory 563 565 Total
Total $1,147 $1,446
Fixed Assets Long-term debt
Net Fixed Assets 1,654 1,719 Total Liabilities
Common Stock and paid-in surplus
Retained Earnings
Total
Total Assets $2,801 $3,165 Total Liabilities and Shareholders' Equity
Why is this called the balance sheet?
RAD Corporation
2006 2007
$237 $278
206 133
$443 $411
418 464
$861 $875
610 638
1,330 1,652
$1,940 $2,290
$2,801 $3,165
$2,801 $2,801 TRUE
Assumptions
Name Your Name
CA 3,000.00
NFA 15,000.00
CL 2,800.00
LTD 8,000.00
Solve for:
Shareholders' Equity =
NWC =
Your Name Company
Balance Sheet
Assets Liabilities + Owners' Equity
CA CL
NFA LTD
Owners Equity
Total Assets Total Liabilities + Owners' Equity
Assumptions
Name Your Name
CA 3,000.00
NFA 15,000.00
CL 2,800.00
LTD 8,000.00
Solve for:
NWC =
Your Name Company
Balance Sheet
CA 3,000.00 $ CL 2,800.00 $
NFA 15,000.00 LTD 8,000.00 $
Owners Equity 7,200.00
Total Assets 18,000.00 $ Total Liabilities + Owners' Equity 18,000.00 $
Total Assets
Total Liabilities and
Fixed Assets
Tangible Fixed Assets
Intangible Fixed Assets
Net Working Capital is the short-term capital (Cash) that the firm has to work with
* Capital is a term that means assets (this term is often used in economics and finance)
* Firm means corporation in this example
What is the working Capital
for the Rad Corp at the end
of 2006?
Current assets
Current Liabilities
Long-term debt
Net Working
Capital
Total Assets
Total Liabilities and
Fixed Assets
Tangible Fixed Assets
Intangible Fixed Assets
Net Working Capital is the short-term capital (Cash) that the firm has to work with
* Capital is a term that means assets (this term is often used in economics and finance)
* Firm means corporation in this example
What is the working Capital
for the Rad Corp at the end
of 2006? 704
Current assets
Current Liabilities
Long-term debt
Net Working
Capital
Current Assets $250
Fixed Assets $625
Current Liabilities $130
Long-term Debt $265
Current Assets $250 Current Liabilities
Fixed Assets $625 Long-term Debt
Total Liabilities
Total Assets Total Liabilities and Shareholders' Equity
Working Capital =
$130
$265
Assumptions
Current Assets $250
Fixed Assets $625
Current Liabilities $130
Long-term Debt $265
Current Assets $250 Current Liabilities
Fixed Assets $625 Long-term Debt
Total Liabilities
Total Assets $875 Total Liabilities and Shareholders' Equity
Working Capital = $250 - $130 = $120
$130
$265
$395
$480
$875
Assumptions
Name Your Company
Date 1 12/31/2009
Date 2 12/31/2010
Statement Balance Sheet
Income Statement
Accounts: Net Fixed Assets
Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009 500,000.00
2010 Income Statement Depreciation Expense 115,000.00
Net Capital Spending for 2010
Assumptions
Name Your Company
Date 1 12/31/2009
Date 2 12/31/2010
Income Statement
Assumptions
Name Your Company
Date 1 12/31/2009
Date 2 12/31/2010
Income Statement
Net Capital Spending for 2010 265,000.00
Assumptions
Name Your Company
Date 1 12/31/2009
Date 2 12/31/2010
Income Statement
Net Capital Spending for 2010 (125,000.00)
Liquidity: How Quickly An Asset Can Be Converted To
Liquidity has two dimensions:
Ease of conversion to cash
Loss of value because you have to sell it quickly
Highly liquid asset:
Quickly sold without significant loss of value (inventory, short-term investments)
Illiquid asset:
Cannot be sold quickly without significant price reduction (machinery, building)
Items on balance sheet are listed in order of decreasing liquidity (most liquid are first)
Liquidity is valuable:
Firm can readily pay bills and buy assets quickly
Liquid assets such as cash tend to be less profitable than illiquid assets such as buildings/trucks and subdivisions
of business
Too many liquid assets may mean the firm is not investing in profitable assets such as machinery to make
products or purchases of other businesses
Assets = Debt + Shareholders' Equity
Use
of
Funds
Source
of
Funds
Fixed Claim (contractual claim) Residual Claim
Interest expense (cash out) is a
tax deductible item
Dividend (Cash out) is not tax
deductible
Paid first during bankruptcy Get what's left over
The topic of whether to use Debt or Equity to raise funds is called "Capital Structure"
The term "Financial Leverage" is used when the firm has debt
The more debt (as a % of assets), the more leverage
Leverage can magnify:
Gains
Losses
More later!
Assets Market or Book Value
Market value
The amount of cash we would get if we sold it
You never know for sure until you sell it
Book value
The historical cost that was recorded when the firm purchased the asset
Required under GAAP (Generally Accepted Accounting Principals). Some Financial Assets are recorded at market value.
Book value of assets often does not reflect the firms most valuable assets such as:
Talented employees/ managers
Customer list
Reputation
Shareholders Equity
The market value for a share of stock is virtually always different that its book value
The goal of the financial manager is to maximize the market value for the stock
Thus, the financial manager is more interested in the MARKET VALUE than the book value
Required under GAAP (Generally Accepted Accounting Principals). Some Financial Assets are recorded at market value.
Assumptions
Name: Queen's Corp
Fixed Assets Book Value $800.00
Fixed Assets Apprised Market Value $1,200.00
Net Working Capital Book Value $500.00
Net Working Capital Market Value (perhaps
inventory value increased) $800.00
Long-term Debt $400.00
What is book value of equity? Queen's Corp
What is the market value of equity? Balance Sheets
Market Value vs. Book Value
Book Market
Net Working Capital
Net Fixed Assets
Queen's Corp
Balance Sheets
Book Market
Long-term Debt
Assumptions
Name: Queen's Corp
Fixed Assets Book Value $800.00
Fixed Assets Apprised Market Value $1,200.00
Net Working Capital Book Value $500.00
Net Working Capital Market Value (perhaps
inventory value increased) $800.00
Long-term Debt $400.00
What is book value of equity? Queen's Corp
What is the market value of equity? Balance Sheets
Book Market
Net Working Capital $500.00 $800.00
Net Fixed Assets 800.00 1,200.00
$1,300.00 $2,000.00
Queen's Corp
Balance Sheets
Book Market
Long-term Debt $400.00 $400.00
Shareholders' Equity 900.00 1,600.00
$1,300.00 $2,000.00
Revenues = Sales = Net Sales = Amounts earned by business from delivering products or services to customer. Example: Customer gets
shoes, business gets $100; the $100 is the Revenue. Revenues may take the form of cash, credit card receipts, or accounts receivable (collect
from customer later).
Expenses = Costs associated with creating Revenues. Example01: The business paid $50 for the shoes and sold the shoes for $100 Revenue;
the $50 is an expense called "Cost Of Goods Sold" or COGS. Example02: Employee's pay is an expense to the business. Expenses may be
paid in cash, immediately or at a future time (accounts payable).
Income Statement = Profits = Earnings = Shows profit for period. Income Statement Formula is: Revenues - Expenses = Net Income
Net Income does not necessarily mean Cash in.
RAD Corporation
Income Statement ($ in Millions)
For The Year Ended December 31, 2007
Rev Net Sales $1,600
Ex Cost of Goods Sold 841
Ex Depreciation 71
Earnings before interest and tax $688
Ex Interest paid 76
Taxable income $612
Ex Taxes 202
Net Income $410
Dividends = $88.00
Addition to retained earnings =
Shares outstanding (in 000,000), Dec 31, 2007 = 210
Earnings per share (EPS) = $410/210 = $1.95 =
Dividends per share = $88/210 = $0.42 =
Rev
enu
es =
Sal Exp
ens
es =
Cos
Inco
me
Net
RAD Corporation
Income Statement ($ in Millions)
For The Year Ended December 31, 2007
Net Sales $1,600
Cost of Goods Sold 841
Depreciation 71
Earnings before interest and tax $688
Interest paid 76
Taxable income $612
Taxes 202
Net Income $410
Dividends = $88.00
Addition to retained earnings = Shares outstanding (in 000,000), Dec 31,
2007 = 210
Earnings per share (EPS) = $410/210 = $1.95
Dividends per share = $88/210 = $0.42 = $0.42
UPS Trucks Cost 5,000,000.00 $
Salvage Value 250,000.00 $
Years in Use 10
SL Depreciation Expense for one Year = (Cost-Salvage)/Years = 475,000.00 $
The Cash went out the first year, but the Depreciation Expense shows up each year even
though the cash was paid out in year 1
Depreciation is a non-cash expense that shows up on the Income Statement
Years in Use 10
The Cash went out the first year, but the Depreciation Expense shows up each year even
though the cash was paid out in year 1
Depreciation is a non-cash expense that shows up on the Income Statement
Years in Use 5
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00
Non-Cash Depr Expense
Other Expenses 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00
Other Expenses 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $
Years in Use 5
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00
Non-Cash Depr Expense 180,000.00 $ 180,000.00 $ 180,000.00 $ 180,000.00 $ 180,000.00 $
Other Expenses 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00
Other Expenses 620,000.00 $ 620,000.00 $ 620,000.00 $ 620,000.00 $ 620,000.00 $
RAD Corporation RAD Corporation
Income Statement ($ in Millions) Balance Sheet ($ in Millions)
For The Year Ended December 31, 2007 Balance Sheet as of December 31, 2006 and 2007
Net Sales $1,600 Assets
Cost of Goods Sold 841 2006 2007
Depreciation 71 Current assets
Earnings before interest and tax $688 Cash $119 $183
Interest paid 76 Accounts Receivable 465 698
Taxable income $612 Inventory 563 565
Taxes 202 Total $1,147 $1,446
Net Income $410 Fixed Assets
Net Fixed Assets 1,654 1,719
Dividends = $88.00
Addition to retained earnings =
Total Assets $2,801 $3,165
Accounting Information does not always give us good information about Cash Flows
In Finance, usually Cash Flows are used for analysis. Because of this, we need to be able to take accounting information and convert it to Cash Flows ==>
How do we calculate the change in anything?
End - Beg
RAD Corporation
Balance Sheet as of December 31, 2006 and
2007
2006 2007
Current Liabilities
Accounts Payable $237 $278
Notes Payable 206 133
Total $443 $411
Long-term debt 418 464
Total Liabilities $861 $875
Common Stock and paid-in surplus 610 638
Retained Earnings 1,330 1,652
Total $1,940 $2,290
Total Liabilities and Shareholders' Equity $2,801 $3,165
In Finance, usually Cash Flows are used for analysis. Because of this, we need to be able to take accounting information and convert it to Cash Flows ==>
Cash flow from assets =
Cash flow to creditors
(bondholders)
+
Cash flow to stockholders
(owners)
Cash flow from assets = Operating cash flow - Net capital spending -
Operating cash flow =
Earnings before interest
and taxes (EBIT)
+ Depreciation -
Net capital spending = Ending net fixed assets -
Beginning net fixed
assets
+
Change in NWC =
Ending NWC (End CA -
End CL)
-
Beginning NWC (Beg CA -
Beg CL)
(bondholders)
= Interest paid -
Net new borrowing (end
long-term debt - beg LTD)
(owners)
= Dividends paid -
Net new equity raised
(end Common stock &
Paid-in surplus - beg CS
& PIS)
Change in net working
capital (NWC)
Taxes
Depreciation
237324758.xls.ms_office - In Class Example
Assumptions
Entrepren
eur
Name: Entrepreneur Corporation
Income
Statement
Year 1 12/31/2009
For The
Year
Year 2 12/31/2010
Tax Rate 34%
Statements Income Statement
Balance Sheet
Requirements:
Prepare an Income Statement for 2010
Prepare an Balance Sheet for 2009 and 2010
Calculate cash flows from assets for 2010
Calculate cash flows to creditors 2010
Calculate cash flows to stockholders 2010
Account Name 2009 2010
Sales 3,810.00 4237
Cost of goods sold 2,063.00 2,198.00
Depreciation 995.00 1,438.00
Interest 245.00 287.00
Dividends 120.00 130.00
Current assets 2,060.00 2,466.00
Net fixed assets 6,790.00 7,407.00
Current liabilities 1,014.00 1,346.00
Long-term debt 2,889.00 2,976.00
Page 39 of 264 Finance is Fun!
Entrepreneur Corporation
Entreprene
ur
Income Statement
Balance
Sheet
For The Year Ended 2010
December
31, 2009
Sales Assets
Cost of goods sold
Depreciation
Earnings before interest and tax
Interest
Taxable income
Taxes
Net Income
Dividends
Addition to retained earnings
Balance Sheet
December 31, 2009 and December 31, 2010
Assets Liabilities and Owners' Equity
2009 2010 2009 2010
Current assets Current liabilities
Net fixed assets Long-term debt
Total Liabilities
Change in Common Stock and Paid-in surplus
Change in Retained earnings
Total Owners' Equity
Total Assets Total Liabilities and Owners' Equity
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = Cash flow from operations - Net capital spending - Change in NWC
Cash flow from operations = EBIT + Depreciation - Taxes
Net capital spending = End net fixed assets - Beg net fixed assets + Depreciation
Change in NWC = End NWC - Beg NWC
Cash flow to creditors = Interest - Net new borrowing
Cash flow to stockholders = Dividends - Net new equity
237324758.xls.ms_office - In Class Example (an)
Assumptions
Entrepren
eur
Name: Entrepreneur Corporation
Income
Statement
Year 1 12/31/2009
For The
Year
Year 2 12/31/2010
Tax Rate 34%
Statements Income Statement
Balance Sheet
Requirements:
Prepare an Income Statement for 2010 Done
Prepare an Balance Sheet for 2009 and 2010 Done
Calculate cash flows from assets for 2010 (197.00) (197.00)
Calculate cash flows to creditors 2010 200.00
Calculate cash flows to stockholders 2010 (397.00)
Account Name 2009 2010
Sales 3,810.00 4237
Cost of goods sold 2,063.00 2,198.00
Depreciation 995.00 1,438.00
Interest 245.00 287.00
Dividends 120.00 130.00
Current assets 2,060.00 2,466.00
Net fixed assets 6,790.00 7,407.00
Current liabilities 1,014.00 1,346.00
Long-term debt 2,889.00 2,976.00
Entreprene
ur
Income Statement
Balance
Sheet
For The Year Ended 2010
December
31, 2009
Sales $4,237.00
Cost of goods sold 2,198.00
Depreciation 1,438.00
Earnings before interest and tax 601.00
Interest 287.00
Taxable income 314.00
Taxes 107.00
Net Income $207.00
Dividends $130.00
Addition to retained earnings $77.00
Balance Sheet
2009 2010 2009 2010
Current assets $2,060.00 $2,466.00 Current liabilities $1,014.00 $1,346.00
Net fixed assets 6,790.00 7,407.00 Long-term debt 2,889.00 2,976.00
Total Liabilities 3,903.00 4,322.00
Change in Common Stock and Paid-in surplus 527.00
Change in Retained earnings 77.00
Total Owners' Equity 4,947.00 $5,551.00
Total Assets $8,850.00 $9,873.00 Total Liabilities and Owners' Equity $8,850.00 $9,873.00
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders True
(197.00) 200.00 (397.00)
(197.00) 1,932.00 2,055.00 74.00
Cash flow from operations = EBIT + Depreciation - Taxes
1,932.00 601 1,438.00 107.00
Net capital spending = End net fixed assets - Beg net fixed assets + Depreciation
2,055.00 7,407.00 6,790.00 1,438.00
74.00 1120 1,046.00
200.00 287.00 87.00
(397.00) $130.00 $527.00
Interest on Debt is Rent on Money
Interest on Debt is deductable on your tax bill
If you use Debt to buy a new asset worth = 500.00 $
The annual interest rate, compunded annually = 8.00%
Tax Rate 30.00%
Interest on Debt the first year = $500.00*8.00% = $40.00 40.00 $
Because Interest on Debt is tax deductable, the $40.00 you paid is subtracted
from earnings, you save $40.00*30.00% = $12.00. In essence, you avoid paying
$12.00 which is a savings to you. If you had not used debt, but instead used
equity, you would not have received the $12.00 savings. 12.00 $
Total Cash going out is then = $40.00 - $12.00 = 28.00 $
Income Statement without Debt Income
Net Sales 1,000.00 $
Expeneses
400.00
Earnings Before Interest and tax 600.00
Interest 40.00
Taxable earnings 560.00
Tax
Net Income
Difference between Debt and No Debt =
Why Debt Good = Saves cash
Why Debt Bad = Too much and you may go bankrupt
Cash going out to the bank ==>
<== Cash coming in from the savings on your tax bill
Income Statement without Debt
Expenses
400.00
Interest -
Tax
Net Income
If you use Debt to buy a new asset worth = 500.00 $
The annual interest rate, compunded annually = 8.00%
Tax Rate 30.00%
Interest on Debt the first year = $500.00*8.00% = $40.00 40.00 $
Because Interest on Debt is tax deductable, the $40.00 you paid is subtracted
from earnings, you save $40.00*30.00% = $12.00. In essence, you avoid paying
$12.00 which is a savings to you. If you had not used debt, but instead used
equity, you would not have received the $12.00 savings. 12.00 $
Total Cash going out is then = $40.00 - $12.00 = 28.00 $
Income Statement without Debt Income
Expeneses
400.00
Interest 40.00
Tax
168.00
Net Income 392.00 $
Difference between Debt and No Debt =
Why Debt Good = Saves cash
Why Debt Bad = Too much and you may go bankrupt
Cash going out to the bank ==>
<== Cash coming in from the savings on your tax bill
Income Statement with Debt
Expenses
400.00
Interest -
Tax
180.00
Net Income 420.00 $
Assumptions
Taxable Income 300,000.00
Tax Rate Table
Income From Income To Tax Rate
- 50,000 15.00%
50,001 75,000 25.00%
75,001 100,000 34.00%
100,001 335,000 39.00%
335,001 10,000,000 34.00%
10,000,001 15,000,000 35.00%
15,000,001 18,333,333 38.00%
18,333,334 + 35.00%
Taxable Income = $300,000.00 C
a
Average Tax Rates = total taxes/taxable income
Marginal Tax Rates = rate used on the next taxable $
* In Finance it is the marginal tax rate that is used in cash flow analysis.
This is because if you are considering a new project, any new cash flows
will be taxed at the marginal rate
Taxable Income = $300,000.00
Calculate tax for entire year
$50,000*15.00% 7,500.00
($75,000-$50,000)*25.00% 6,250.00
($100,000-$75,000)*34.00% 8,500.00
($300,000-$100,000)*39.00% 78,000.00
Average Tax Rate =
Marginal Tax Rate for next dollar =
Assumptions
Tax Rate Table
Income From Income To Tax Rate
- 50,000 15.00%
50,001 75,000 25.00%
75,001 100,000 34.00%
100,001 335,000 39.00%
335,001 10,000,000 34.00%
10,000,001 15,000,000 35.00%
15,000,001 18,333,333 38.00%
18,333,334 + 35.00%
Taxable Income = $300,000.00 C
a
Average Tax Rates = total taxes/taxable income
Marginal Tax Rates = rate used on the next taxable $
* In Finance it is the marginal tax rate that is used in cash flow analysis.
This is because if you are considering a new project, any new cash flows
will be taxed at the marginal rate
$50,000*15.00% 7,500.00
($75,000-$50,000)*25.00% 6,250.00
($100,000-$75,000)*34.00% 8,500.00
($300,000-$100,000)*39.00% 78,000.00 check:
100,250.00 100250
Average Tax Rate = 0.33417
Marginal Tax Rate for next dollar = 0.39000
taxable earnings Rate Cumulative Amount Tax From Previous brackets
0 15.00% 0
50,000 25.00% 7500
75,000 34.00% 13,750.00
100,000 39.00% 22,250.00
335,000 34.00% 113,900.00
10,000,000 35.00% 3,400,000.00
15,000,000 38.00% 5,150,000.00
18,333,333 35.00% 6,416,667.00
Cumulative Amount Tax From Previous brackets
237324758.xls.ms_office 2005 C Corporation Tax Rates Accounting Is Fun!
2004 Corporate Income Tax Rates (for C corporations)
http://www.givingto.msu.edu/pgaol/html/2004_federal_income_tax_rates.html
VLOOKUP Over But Not Over Tax from previous
bracket
Rate for this bracket The tax is Of excess over
$0 $0 $50,000 15.00% 15% 0
$50,001 50,000 75,000 $7,500 25.00% 7,500 + 25% $50,000
$75,001 75,000 100,000 13,750 34.00% 13,750 + 34% 75,000
$100,001 100,000 335,000 22,250 39.00% 22,250 + 39% 100,000
$335,001 335,000 10,000,000 113,900 34.00% 113,900 + 34% 335,000
$10,000,001 10,000,000 15,000,000 3,400,000 35.00% 3,400,000 + 35% 10,000,000
$15,000,001 15,000,000 18,333,333 5,150,000 38.00% 5,150,000 + 38% 15,000,000
$18,333,334 18,333,333 35.00% 35% 0
The corporate rate schedule neutralizes the benefit of the two lowest brackets for higher-income corporations by levying
a 5% surtax on corporate taxable income between $100,001 and $335,000. Corporations which pay tax at the corporate
level (C corporations) with taxable incomes of at least $335,001 but not over $10 million essentially pay a flat 34% tax.
Taxable income over $10 million is taxed at 35%, but with a surtax of the lesser of $100,000 or 3% of taxable income
over $15 million. Above $18,333,333, the tax rate becomes a flat 35%.
Corporations that have made an S election generally are not taxed as corporations. Instead, their net income passes
through and is taxed directly to the shareholders on their personal income tax returns.
Certain personal service corporations are taxed at a flat rate of 35% regardless of the amount of their taxable income.
Taxable Income = 300,000.00
Total Tax = 100250
Page 57 of 264
http://finance.yahoo.com/q?s=wfmi http://biz.yahoo.com/f/g/g.html
Whole Foods Market, Inc.
Consolidated Balance Sheets
(In thousands)
September24, 2006 and September25, 2005

Assets
Current assets:
Cash and cash equivalents
Short-term investments available-for-sale securities
Restricted cash
Trade accounts receivable
Merchandise inventories
Prepaid expenses and other current assets
Deferred income taxes

Total current assets

Property and equipment, net of accumulated depreciation and amortization
Goodwill
Intangible assets, net of accumulated amortization
Deferred income taxes
Other assets

Total assets

Liabilities and Shareholders Equity
Current liabilities:
Current installments of long-term debt and capital lease obligations
Trade accounts payable
Accrued payroll, bonus and other benefits due team members
Dividends payable
Other current liabilities

Total current liabilities

Long-term debt and capital lease obligations, less current installments
Deferred rent liability
Other long-term liabilities

Total liabilities

Shareholders equity:
Common stock, no par value, 300,000 shares authorized;
142,198 and 136,017 shares issued, 139,607 and 135,908 shares
outstanding in 2006 and 2005, respectively
Common stock in treasury, at cost
Accumulated other comprehensive income
Retained earnings

Total shareholders equity

Commitments and contingencies

Total liabilities and shareholders equity

The accompanying notes are an integral part of these consolidated financial statements.

37
Table of Contents
Consolidated Statements of Operations
(In thousands, except per share amounts)
Fiscal years ended September24, 2006,September25, 2005 and September26, 2004

Sales
Cost of goods sold and occupancy costs

Gross profit
Direct store expenses
General and administrative expenses
Pre-opening and relocation costs

Operating income
Other income (expense):
Interest expense
Investment and other income

Income before income taxes

Provision for income taxes

Net income

Basic earnings per share

Weighted average shares outstanding

Diluted earnings per share

Weighted average shares outstanding, diluted basis

Dividends declared per share


38
Table of Contents
Consolidated Statements of Shareholders Equity and Comprehensive Income
(In thousands)
Balances at September28, 2003

Net income
Foreign currency translation adjustments
Reclassification adjustments for losses included in net income
Change in unrealized gain (loss) on investments, net of income taxes

Comprehensive income
Dividends ($0.30 per share)
Issuance of common stock pursuant to team member stock plans
Issuance of common stock in connection with acquisition
Tax benefit related to exercise of team member stock options
Other


Net income
Reclassification adjustments for losses included in net income

Share-based compensation
Conversion of subordinated debentures


Net income

Purchase of treasury stock
Excess tax benefit related to exercise of team member stock options
Conversion of subordinated debentures



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Consolidated Statements of Cash Flows
(In thousands)

Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on disposal of fixed assets
Deferred income tax expense (benefit)
Interest accretion on long-term debt
Deferred rent
Other
Net change in current assets and liabilities:
Trade accounts receivable
Merchandise inventories
Prepaid expenses and other current assets
Trade accounts payable
Accrued payroll, bonus and other benefits due team member
Other accrued expenses

Net cash provided by operating activities

Cash flows from investing activities

Development costs of new store locations
Other property, plant and equipment expenditures
Proceeds from hurricane insurance
Acquisition of intangible assets
Change in notes receivable
Purchase of available-for-sale securities
Sale of available-for-sale securities
Increase in restricted cash
Payment for purchase of acquired entities, net of cash acquired
Other investing activities

Net cash used in investing activities

Cash flows from financing activities

Dividends paid
Issuance of common stock
Purchase of treasury stock
Payments on long-term debt and capital lease obligations

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosures of cash flow information:

Interest paid
Federal and state income taxes paid
Non-cash transactions:
Common stock issued in connection with acquisition
Conversion of convertible debentures into common stock, net of fees
Notes to Consolidated Financial Statements
(1) Description of Business
Whole Foods Market, Inc. and its consolidated subsidiaries (collectively Whole Foods Market, Company, or We) own and operate the largest chain of natural and organic foods supermarkets. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last 25 years. We opened our first store in Texas in 1980 and, as of September 24, 2006, have expanded our operations both by opening new stores and acquiring existing stores from third parties to 186 stores: 177 stores in 31 U.S. states and the District of Columbia; three stores in Canada; and six stores in the United Kingdom.
(2) Summary of Significant Accounting Policies
Definition of Fiscal Year
We report our results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2006, 2005 and 2004 were 52-week years.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant majority-owned subsidiaries are consolidated on a line-by-line basis, and all significant intercompany accounts and transactions are eliminated upon consolidation.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
Investments
We classify as available-for-sale our cash equivalent investments and our short-term and long-term investments in debt and equity securities that have readily determinable fair values. Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale investments are excluded from earnings and are reported as a separate component of shareholders equity until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary or for a period greater than two fiscal quarters results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis of the security is established. Cost basis is established and maintained utilizing the specific identification method.
Restricted Cash
Restricted cash primarily relates to cash held as collateral to support projected workers compensation obligations.
Inventories
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (LIFO) method for approximately 94% of inventories in fiscal years 2006 and 2005. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was approximately $13.2 million and $10.7 million at September 24, 2006 and September 25, 2005, respectively. Costs for remaining inventories are determined by the first-in, first-out (FIFO) method.
Cost was determined using the retail method for approximately 54% of inventories in fiscal years 2006 and 2005. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins. Cost was determined using the item cost method for approximately 46% of inventories in fiscal years 2006 and 2005. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely man

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Our largest supplier, United Natural Foods, Inc., accounted for approximately 22%, 22% and 20% of our total purchases in fiscal years 2006, 2005 and 2004, respectively.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. We provide depreciation of equipment over the estimated useful lives (generally three to 15 years) using the straight-line method. We provide amortization of leasehold improvements on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Terms of leases used in the determination of estimated useful lives may include renewal periods at the Companys option if exercise of the option is determined to be reasonably assured at the inception of the lease. We provide depreciation of buildings over the estimated useful lives (generally 20 to 30 years) using the straight-line method. Costs related to a projected site determined to be unsatisfactory and general site selection costs that cannot be identified with a specific store location are charged to operations currently. The Company recognizes a liability for the fair value of a conditional asset retire
Operating Leases
The Company leases stores, distribution centers, bakehouses and administrative facilities under operating leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of specified levels. Most of our lease agreements include renewal periods at the Companys option. We recognize rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space for construction and other purposes. We record tenant improvement allowances and rent holidays as deferred rent liabilities and amortize the deferred rent over the terms of the lease to rent. We record rent liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels will be reached during the fiscal year.
Goodwill
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. Goodwill is reviewed for impairment annually, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our annual impairment review requires extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results.
Intangible Assets
Intangible assets include acquired leasehold rights, liquor licenses, license agreements, non-competition agreements and debt issuance costs. Indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise. We amortize definite-lived intangible assets on a straight-line basis over the life of the related agreement, currently one to 48 years for contract-based intangible assets and one to five years for marketing-related and other identifiable intangible assets.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. When the Company commits to relocate a location, a charge to write down the related assets to their estimated net recoverable value is included in the Pre-opening and relocation costs line item in the Consolidated Statements of Operations.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued payroll, bonuses and team member benefits, and other accrued expenses approximate fair value because of the short maturity of those instruments. Investments are stated at fair value with unrealized gains and losses included as a component of shareholders equity until realized.

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The fair value of convertible subordinated debentures is estimated using quoted market prices. The fair value of senior unsecured notes is estimated by discounting the future cash flows at the rates currently available to us for similar debt instruments of comparable maturities. Carrying amounts and estimated fair values of our financial instruments other than those for which carrying amounts approximate fair values as noted above are as follows (in thousands):

Convertible subordinated debentures
Senior unsecured notes
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers compensation, general liability, property insurance, director and officers liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Revenue Recognition
We recognize revenue for sales of our products at the point of sale. Discounts provided to customers at the point of sale are recognized as a reduction in sales as the products are sold.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, contribution from non-retail distribution and food preparation operations, shipping and handling costs and occupancy costs. The Company receives various rebates from third party vendors in the form of quantity discounts and payments under cooperative advertising agreements. Quantity discounts and co-operative advertising discounts in excess of identifiable advertising costs are recognized as a reduction of cost of goods sold when the related merchandise is sold.
Advertising
Advertising and marketing expense for fiscal years 2006, 2005 and 2004 was approximately $24.0 million, $20.1 million and $17.4 million, respectively. These amounts are shown net of vendor allowances received for co-operative advertising of approximately $1.2 million, $1.2 million and $1.0 million in fiscal years 2006, 2005 and 2004, respectively. Advertising costs are charged to expense as incurred and are included in the Direct store expenses line item in the Consolidated Statements of Operations.
Pre-opening and Relocation Costs
Pre-opening costs include rent expense incurred during construction of new stores and costs related to new store openings including costs associated with hiring and training personnel, smallwares, supplies and other miscellaneous costs. Rent expense is generally incurred approximately nine months prior to a stores opening date. Other pre-opening costs are incurred primarily in the 30 days prior to a new store opening. Pre-opening costs are expensed as incurred. Relocation costs, which consist of moving costs, remaining lease payments, accelerated depreciation costs, asset impairment costs, other costs associated with replaced facilities and other related expenses, are expensed as incurred.
Share-Based Compensation
Our Company maintains several share-based incentive plans. We grant options to purchase common stock under our 1992 Stock Option Plans, as amended. Under these plans, options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date and have a five-year term. The grant date is established once the Companys Board of Directors approves the grant and all key terms have been determined. The exercise prices of our stock option grants are the closing price on the grant date. Stock option grant terms and conditions are communicated to team members within a relatively short period of time. Our Board of Directors generally approves one primary stock option grant annually with a grant date that occurs during a trading window. Our Company offers a team member stock purchase plan to all full-time team members with a minimum of 400 hours of

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service. Under this plan, participating team members may purchase our common stock each calendar quarter through payroll deductions. Participants in the stock purchase plan may elect to purchase unrestricted shares at 100 percent of market value or restricted shares at 85 percent of market value on the purchase date.
Prior to the effective date of revised Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, the Company applied Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees and related interpretations for our stock option grants. APB No. 25 provides that the compensation expense relative to our team member stock options is measured based on the intrinsic value of the stock option at date of grant.
Effective the beginning of the first quarter of fiscal year 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective transition method. Under this method, prior periods were not restated. The Companys methods used to determine share-based compensation, which includes the utilization of the Black-Scholes option pricing model, requires extensive use of accounting judgment and financial estimates, including estimates of the expected term team members will retain their vested stock options before exercising them, the estimated volatility of the Companys common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. The related share-based compensation expense is recognized on a straight-line basis over the vesting period. Application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation and consequently, the related amounts recogni
SFAS No. 123R requires the Company to value unvested stock options granted prior to its adoption of SFAS No. 123 under the fair value method and expense these amounts in the income statement over the stock options remaining vesting period. In the fourth quarter of fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options held by the members of the executive team and certain options held by team members in the United Kingdom, in order to prevent past option grants from having an impact on future results. The Company intends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings per share dilution from equity-based compensation expense will not exceed 10%.
Prior to the adoption of SFAS No. 123R, the Company presented the tax savings resulting from tax deductions resulting from the exercise of stock options as an operating cash flow, in accordance with Emerging Issues Task Force (EITF) Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123R requires the Company to reflect gross tax savings resulting from tax deductions in excess of expense reflected in its financial statements, including pro forma amounts, as a financing cash flow.
In November 2005, the FASB issued Staff Position No. FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of the Share-Based Payment Awards (FSP FAS 123R-3). The Company has elected to adopt the transition guidance for the additional paid-in-capital pool (APIC pool) pool in paragraph 81 of SFAS No. 123R. The prescribed transition method is a detailed method to establish the beginning balance of the APIC pool related to the tax effects of share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of the tax effects of share-based compensation awards that are outstanding upon adoption of SFAS No. 123R.
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.
Earnings per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the fiscal period. Diluted earnings per share is based on the weighted average number of common shares outstanding plus, where applicable, the additional common shares that would have been outstanding as a result of the conversion of dilutive options and convertible debt.

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Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, and unrealized gains and losses on marketable securities, net of income taxes. Comprehensive income is reflected in the Consolidated Statements of Shareholders Equity and Comprehensive Income. At September 24, 2006, accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately $6.9 million and unrealized gains on marketable securities of approximately $0.1 million. At September 25, 2005, accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately $4.4 million.
Foreign Currency Translation
The Companys Canadian and United Kingdom operations use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income.
Segment Information
We operate in one reportable segment, natural foods supermarkets. We currently have three stores in Canada and six stores in the United Kingdom. All of our remaining operations are domestic.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. We use estimates when accounting for depreciation and amortization, allowance for doubtful accounts, inventory valuation, long-term investments, team member benefit plans, team member health insurance plans, workers compensation liabilities, share-based compensation, store closure reserves, income taxes and contingencies.
Reclassifications
Where appropriate, we have reclassified prior years financial statements to conform to current year presentation.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.108 (SAB No. 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements. SAB No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires an entity to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The requirements of SAB No. 108 are effective for fiscal years ending after November 15, 2006. We are currently evaluating the effect, if any, that the adoption of SAB No. 108 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measures. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value and does not change existing guidance as to whether or not an instrument is carried at fair value. The provisions of SFAS No. 157 are effective for the specified fair value measures for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.
In July 2006, the FASB issued Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance with Statement 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on managements best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006. Early adoption is permitted as of the beginning of an enterprises fiscal year, provided the enterprise has not yet issued financial statements, including financial stat

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In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation). Taxes within the scope of EITF Issue No. 06-3 include any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, sales taxes, use taxes, value-added taxes, and some excise taxes. The EITF concluded that the presentation of these taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed. For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements. The Companys policy is to exclude all such taxes from revenue. The provisions of EITF 06-3 are effecti
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a Replacement of Accounting Principles Board Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. The provisions of SFAS No. 1
(3) Natural Disaster Costs
The Company has two stores in the New Orleans area which were damaged by and closed due to Hurricane Katrina during the fourth quarter of fiscal year 2005, and accordingly the Company recorded expenses totaling approximately $16.5 million for related estimated net losses. The main components of the $16.5 million expense were estimated impaired assets totaling approximately $12.2 million, estimated inventory losses totaling approximately $2.5 million, salaries and relocation allowances for displaced Team Members and other costs totaling approximately $3.4 million, and a $1.0 million special donation from the Company to the American Red Cross, net of accrued estimated insurance proceeds totaling approximately $2.6 million. In fiscal year 2005, approximately $13.4 million of net natural disaster costs is included in Direct store expenses in the Consolidated Statements of Operations, approximately $1.0 million is included in General and administrative expenses, and approximately $2.1 million is included in C
(4) Property and Equipment
Balances of major classes of property and equipment are as follows (in thousands):

Land
Buildings and leasehold improvements
Fixtures and equipment
Construction in progress and equipment not yet in service

Less accumulated depreciation and amortization

Depreciation and amortization expense related to property and equipment totaled approximately $152.4 million, $129.8 million and $111.2 million for fiscal years 2006, 2005 and 2004, respectively. Property and equipment included accumulated

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accelerated depreciation and other asset impairments totaling approximately $13.1 million and $5.9 million at September24, 2006 and September25, 2005, respectively. Property and equipment includes approximately $0.9 million, $3.0 million and $2.1 million of interest capitalized during fiscal years 2006, 2005 and 2004, respectively. Development costs of new store locations totaled approximately $208.6 million, 207.8million and $156.7 million in fiscal years 2006, 2005 and 2004, respectively. As of November2, 2006, we had signed leases for 88 stores under development.
(5) Business Combinations
Fresh& Wild Holdings Limited
On January 31, 2004, we acquired all of the outstanding stock of Fresh & Wild Holdings Limited (Fresh & Wild) for a total of approximately $20 million in cash and approximately $16 million in Company common stock, totaling 477,470 shares. The acquisition of Fresh & Wild, which owned and operated seven natural and organic food stores in London and Bristol, England, provided a platform for expansion of the Whole Foods Market brand in the United Kingdom. This transaction was accounted for using the purchase method and, accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $30.5 million have been recorded as goodwill. Fresh & Wild results of operations are included in our consolidated income statements for the period beginning February 1, 2004 through September 26, 2004 and all subsequent periods. John Mackey and W
Select Fish LLC
On October 27, 2003, we acquired certain assets of Select Fish LLC (Select Fish) in exchange for approximately $3 million in cash plus the assumption of certain liabilities. All assets acquired relate to a seafood processing and distribution facility located in Seattle, Washington. This transaction was accounted for using the purchase method. Accordingly the purchase price was allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of the acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $1.1 million have been recorded as goodwill. Select Fish results of operations are included in our consolidated income statements beginning October 27, 2003.
-6 Goodwill
and Other
Intangible
Assets
Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. During fiscal year 2006, we acquired goodwill totaling approximately $1.1 million, primarily related to the acquisition of one small store in Portland, Maine. We acquired indefinite-lived intangible assets totaling approximately $50,000 and $0.7 million during fiscal years 2006 and 2005, respectively, consisting primarily of liquor licenses. There was no impairment of goodwill or indefinite-lived intangible assets during fiscal years 2006, 2005 or 2004.
Definite-lived intangible assets are amortized over the useful life of the related agreement. We acquired definite-lived intangible assets totaling approximately $15.7 million and $1.5 million during fiscal years 2006 and 2005, respectively, consisting primarily of acquired leasehold rights. Amortization associated with intangible assets totaled approximately $2.5 million, $2.8 million, and 3.0million during fiscal years 2006, 2005 and 2004, respectively. The components of intangible assets were as follows (in thousands):

Indefinite-lived contract-based
Definite-lived contract-based
Definite-lived marketing-related and other

Amortization associated with the net carrying amount of intangible assets is estimated to be approximately $2.4 million in fiscal year 2007, $2.3 million in fiscal year 2008, $2.3 million in fiscal year 2009, $2.2 million in fiscal year 2010 and $2.2 million in fiscal year 2011.

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(7) Long-Term Debt
We have long-term debt and obligations under capital leases as follows (in thousands):

Obligations under capital lease agreements for equipment, due in monthly installments through
2012

Senior unsecured notes
Convertible debentures, including accreted interest

Total Long-term debt

Less current installments

Long-term debt, less current installments

On October1, 2004, we amended our credit facility to extend the maturity of our $100 million revolving line of credit to October1, 2009. The credit agreement contains certain affirmative covenants including maintenance of certain financial ratios and certain negative covenants including limitations on additional indebtedness as defined in the agreement. At September24, 2006 and September25, 2005, we were in compliance with the applicable debt covenants. All outstanding amounts borrowed under this agreement bear interest at our option of either the defined base rate or the LIBOR rate plus a premium. Commitment fees of 0.15% of the undrawn amount are payable under this agreement. At September24, 2006 and September25, 2005 no amounts were drawn under the agreement. The amount available to the Company under the agreement was effectively reduced to $88.4 million by outstanding letters of credit totaling approximately $11.6 million at September25, 2005. On November7, 2005, we amended our credit facility to
We have outstanding zero coupon convertible subordinated debentures which had a carrying amount of approximately $8.3 million and $12.9 million at September24, 2006 and September25, 2005, respectively. The debentures have an effective yield to maturity of 5 percent and a scheduled maturity date of March2, 2018. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures may be redeemed at the option of the holder on March2, 2008 or March2, 2013 at the issue price plus accrued original discount to the date of redemption. Subject to certain limitations, at our option, we may elect to pay this purchase price in cash, shares of common stock or any combination thereof. The debentures may also be redeemed in cash at the option of the holder if there is a change in control at the issue price plus accrued original discount to the date of redemption. The Company may redeem the debentures for cash, in whole or in
We also had outstanding senior unsecured notes that bear interest at 7.29% payable quarterly with a carrying amount of approximately $5.7 million at September25, 2005. The Company made the final principal payment totaling approximately $5.7 million to retire its senior notes on May16, 2006.
(8) Leases
The Company is committed under certain capital leases for rental of equipment and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates from 2006 to 2038. Amortization of equipment under capital lease is included with depreciation expense.

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Rental expense charged to operations under operating leases for fiscal years 2006, 2005 and 2004 totaled approximately $153.1 million, $124.8 million and $99.9 million, respectively. Minimum rental commitments required by all non-cancelable leases are approximately as follows (in thousands):

2007
2008
2009
2010
2011
Future fiscal years

Less amounts representing interest

Net present value of capital lease obligations

Less current installments

Long-term capital lease obligations, less current installments

During fiscal years 2006, 2005 and 2004, we paid contingent rentals totaling approximately $9.6 million, $7.6 million and $4.8 million, respectively. No asset retirement obligations have been incurred associated with operating leases. Sublease rental income totaled approximately $1.6 million, $1.3 million and $1.4 million during fiscal years 2006, 2005 and 2004, respectively. John Mackey and Glenda Chamberlain, executive officers of the Company, own approximately 51% and 2%, respectively, of BookPeople, Inc., a retailer of books and periodicals that is unaffiliated with the Company, which leases retail space in Austin, Texas from the Company. The lease provides for an aggregate annual minimum rent of approximately $0.4 million which the Company received in rental income in fiscal years 2006, 2005 and 2004.
(9) Income Taxes
Components of income tax expense are as follows (in thousands):

Current federal income tax
Current state income tax

Total current tax

Deferred federal income tax

Deferred state income tax

Total deferred income tax

Total income tax expense

Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to income before income taxes as follows (in thousands):

Federal income tax based on statutory rates
Increase (reduction) in income taxes resulting from:
Change in valuation allowance
Tax exempt interest
Deductible state income taxes
Other, net

Total federal income taxes

State income taxes

Total income tax expense

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Current income taxes payable as of September24, 2006 and September25, 2005 totaled approximately $27.2 million and $5.2 million, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

Deferred tax assets:
Compensation-related costs
Insurance-related costs
Inventories
Lease and other termination accruals
Rent differential
Net domestic and international operating loss carryforwards
Capital loss carryforwards

Gross deferred tax assets

Valuation allowance

Deferred tax liabilities:

Financial basis of fixed assets in excess of tax basis
Inventories
Capitalized costs expensed for tax purposes
Other

Net deferred tax asset

Current assets
Noncurrent assets

Net deferred tax asset

As of September24, 2006, we had international operating loss carryforwards totaling approximately $32.5 million, of which approximately $11.8 million will begin to expire in fiscal year 2008 and approximately $20.7 million has an indefinite life. During fiscal year 2006, approximately $31,000 of the valuation allowance related to the utilization of certain operating and capital loss carryforwards was released. Additionally, the valuation allowance decreased by approximately $4.1 million due to the expiration of capital loss carryforwards for which no benefit was realized. We have provided a valuation allowance of approximately $13.3 million for deferred tax assets associated with international operating loss carryforwards and domestic capital loss carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes that it is more likely than not that we will fully realize the remaining domestic deferred tax assets in the form of f
(10) Investments
We had short-term cash equivalent investments totaling approximately $10.1 million and $325.7 million at September24, 2006 and September25, 2005, respectively.
As of September24, 2006, we also had short-term available-for-sale securities, generally consisting of state and local government obligations totaling approximately $193.8 million. Gross unrealized gains on the securities totals approximately $77,000 as of September24, 2006.

50
Table of Contents
(11) Shareholders Equity
Dividends
The Companys Board of Directors approved the following dividends during fiscal years 2006 and 2005 (in thousands, except per share amounts):
Date of Declaration
Deferred taxes have been classified on the consolidated balance sheets as follows:

Fiscal year 2006:
November9, 2005

November9, 2005
March6, 2006
June13, 2006
Fiscal year 2005:
November10, 2004
April5, 2005
June7, 2005
September14, 2005

On September 27, 2006, the Companys Board of Directors approved a quarterly dividend of $0.15 per share that was paid on October 23, 2006 to shareholders of record on October 13, 2006. On November 2, 2006, the Companys Board of Directors approved a 20% increase in the Companys quarterly dividend to $0.18 per share payable on January 22, 2007 to shareholders of record on January 12, 2007. The Company will pay future dividends at the discretion of the Board of Directors. The continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis.
On November 9, 2005, the Companys Board of Directors approved a two-for-one stock split to be distributed on December 27, 2005 to shareholders of record at the close of business on December 12, 2005. The stock split was effected in the form of a stock dividend. Shareholders received one additional share of Whole Foods Market common stock for each share owned. All share and per share amounts in these financial statements have been adjusted to reflect the effect of the stock split. All shares reserved for issuance pursuant to the Companys stock option and stock purchase plans were automatically increased by the same proportion. In addition, shares subject to outstanding options or other rights to acquire the Companys stock and the exercise price for such shares were adjusted proportionately.
Treasury Stock
On November 8, 2005, the Companys Board of Directors approved a stock repurchase program of up to $200 million over the next four years. During the fourth quarter of fiscal year 2006, the Company repurchased on the open market approximately 2.0 million shares of Company common stock that were held in treasury at September 24, 2006. The average price per share paid was $49.85, for a total of approximately $100 million. At September 25, 2005, we had no shares of Company common stock in treasury.
On November 6, 2006, the Companys Board of Directors approved a $100 million increase in the Companys stock repurchase program, bringing the total remaining authorization to $200 million over the next three years. The specific timing and repurchase amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Companys available cash resources and line of credit availability. The repurchase program may be suspended or discontinued at any time without prior notice.
(12) Earnings per Share
The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options and the assumed conversion of zero coupon convertible subordinated debentures.

51
Table of Contents
A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except per share amounts):

Net income (numerator for basic earnings per share)
Interest on 5% zero coupon convertible subordinated debentures, net of income taxes

Adjusted net income (numerator for diluted earnings per share)

Weighted average common shares outstanding (denominator for basic earnings per share)

Potential common shares outstanding:

Assumed conversion of 5% zero coupon convertible subordinated debentures
Assumed exercise of stock options

Weighted average common shares outstanding and potential additional common shares outstanding
(denominator for diluted earnings per share)

Date of Declaration


The computation of diluted earnings per share does not include options to purchase approximately 4.3million, 158,000 shares and 6,000 shares of common stock at the end of fiscal years 2006, 2005 and 2004, respectively, due to their antidilutive effect.
(13) Share-Based Compensation
Total share-based compensation expense recognized during fiscal year 2006 and fiscal year 2005 was approximately $9.4 million and $19.9 million, respectively. Of these totals, approximately $3.6 million and $10.1 million was included in Direct store expenses, $5.5 million and $8.6 million was included in General and administrative expenses, and $0.3 million and $1.2 million was included in Cost of goods sold and occupancy costs in the Consolidated Statements of Operations in fiscal year 2006 and fiscal year 2005, respectively. The related total tax benefit was approximately $2.7 million and $4.5 million in fiscal year 2006 and fiscal year 2005, respectively. Our Company maintains several share-based incentive plans.
Stock Option Plan
We grant options to purchase common stock under our 1992 Stock Option Plans, as amended. Under these plans, options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date. Options granted in fiscal year 2006 expire five years from the date of grant and options granted in fiscal years 2005 and 2004 expire seven years from date of grant. Certain options granted during fiscal year 2005 were granted fully vested. Our Company has, in connection with certain of our business combinations, assumed the stock option plans of the acquired companies. All options outstanding under our Companys previous plans and plans assumed in business combinations continue to be governed by the terms and conditions of those grants. The market value of the stock is determined as the closing stock price at the grant date. At September 24, 2006, September 25, 2005 and September 26, 2004 approximately 6.5 milli

52
Table of Contents
The following table summarizes option activity (in thousands, except per share amounts):
Outstanding options September28, 2003
Options granted
Options exercised
Options expired

Outstanding options at September26, 2004

Options granted
Options exercised
Options expired


Options granted
Options exercised
Options expired
Options forfeited


Vested/expected to vest at September24, 2006

Exercisable options at September24, 2006

The weighted average fair values of options granted during fiscal years 2006, 2005 and 2004 were $17.04, $15.19 and $14.69, respectively. The aggregate intrinsic value of stock options at exercise, represented in the table above, was approximately $180.0 million during fiscal year 2006. Total gross unrecognized share-based compensation expense related to nonvested stock options was approximately $25.2 million as of the end of fiscal year 2006, related to approximately 1.5million shares. We anticipate this expense to be recognized over a weighted average period of approximately two years.
A summary of options outstanding and exercisable at September24, 2006 follows (share amounts in thousands):
From
$10.47
21.76
39.61
41.05
54.75
68.96

Total

Share-based compensation expense related to vesting stock options recognized during fiscal year 2006 totaled approximately $4.6 million.
During fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options held by the members of the executive team and certain options held by team members in the United Kingdom, in order to prevent past option grants from having an impact on future results. The Company recognized a share-based compensation charge totaling approximately $17.4 million related to this acceleration, which was determined by measuring the intrinsic value on the date of the acceleration for all options that would have expired in the future unexercisable had the acceleration not occurred. The calculation of this charge required that management make estimates and assumptions concerning future team member turnover. In the fourth quarter of fiscal year 2006 the Company recognized an additional $3.0 million share-based compensation charge related to this acceleration to adjust for actual experience. Additional adjustments in future periods may be necessary as actual results could differ from these es

53
Table of Contents
The Company also recognized share-based compensation totaling approximately $1.2 million and $2.5 million for modifications of terms of certain stock option grants and other compensation based on the intrinsic value of the Companys common stock during fiscal years 2006 and 2005, respectively.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life, in years
Risk-free interest rate is based on the US treasury yield curve for a three and a half-year term and the seven-year zero coupon treasury bill rate on the dates of the annual grant in fiscal year 2006 and fiscal year 2005, respectively. Expected volatility is calculated using a ratio of implied volatility based on comparable Long-Term Equity Anticipation Securities (LEAPS) and four-year historical volatility for fiscal year 2006. The Company determined the use of implied volatility versus historical volatility represents a more accurate calculation of option fair value. In fiscal year 2005, expected volatility was calculated using the daily historical volatility over the last seven years. Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last five years, in fiscal year 2006. During fiscal year 2005, expected life was calculated in five salary tranches based on weighted average exercise-after-vesting informatio
In accordance with SFAS No. 123R, the Company adopted the provisions of SFAS No. 123R in the first quarter of fiscal year 2006 using the modified prospective approach. Under this method, prior periods are not restated. As a result of adoption, the Companys income before income taxes and net income for fiscal year 2006, are $6.4 million and $3.8 million lower, respectively, than if we had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for fiscal year 2006 are $0.03 lower than if we had continued to account for share-based compensation under APB No. 25. Had we previously recognized compensation costs as prescribed by SFAS No. 123, previously reported net income, basic earnings per share and diluted earnings per share would have changed to the pro forma amounts shown below (in thousands, except per share amounts):

Reported net income
Share-based compensation expense, net of income taxes
Pro forma expense, net of income taxes

Pro forma net income (loss)

Exercise Prices

Rangeof
Basic earnings per share:

Reported
Share-based compensation expense
Pro forma adjustment

Pro forma basic earnings (loss) per share

Diluted earnings per share:

Reported
Share-based compensation expense
Pro forma adjustment

Pro forma diluted earnings (loss) per share

Pro forma disclosures for fiscal year 2006 are not presented because the amounts are recognized in the Consolidated Statement of Operations.

54
Table of Contents
Team Member Stock Purchase Plan
Our Company also offers a team member stock purchase plan to all full-time team members with a minimum of 400 hours of service. Under this plan, participating team members may purchase our common stock each fiscal quarter through payroll deductions. Participants in the stock purchase plan may elect to purchase unrestricted shares at 100 percent of market value or restricted shares at 85 percent of market value on the purchase date. Participants are required to hold restricted shares for two years before selling them. In fiscal year 2006, we recognized approximately $0.6 million of share-based compensation expense related to team member stock purchase plan discounts. We issued approximately 51,000, 40,000 and 32,000 shares under this plan in fiscal years 2006, 2005 and 2004, respectively. At September24, 2006,September25, 2005 and September26, 2004 approximately 369,000, 420,000, and 460,000 shares of our common stock, respectively, were available for future issuance.
(14) Team Member 401(k) Plan
Our Company offers a team member 401(k) plan to all team members with a minimum of 1,000 services hours in one year. In fiscal years 2006 and 2005, the Company made a matching contribution to the plan of approximately $2.3 million in cash. The Company did not make a matching contribution to the plan in fiscal year 2004.
(15) Quarterly Results (unaudited)
The Companys first quarter consists of 16 weeks, and the second, third and fourth quarters consist of 12 weeks. Because the first quarter is longer than the remaining quarters, it typically represents a larger share of our annual sales from existing stores. Quarter to quarter comparisons of results of operations have been and may be materially impacted by the timing of new store openings. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
The Company accelerated the vesting of all outstanding stock options on September 22, 2005 in order to prevent past option grants from having an impact on future results. The Company incurred a share-based compensation charge totaling approximately $18.2 million in the fourth quarter of fiscal year 2005, primarily a non-cash charge related to this accelerated vesting of options. The Companys effective tax rate for the fourth quarter and fiscal year 2005 was higher than its historical rate primarily due to the non-deductible portion of the expense recognized for the accelerated vesting of stock options. In the fourth quarter of fiscal year 2006, the Company recorded additional $3.0 million non-cash share-based compensation charge to adjust the estimate related to accelerated vesting for actual experience.
The Company has two stores in the New Orleans area which were damaged by and closed due to Hurricane Katrina during the fourth quarter of fiscal year 2005, and accordingly the Company recorded expenses totaling approximately $16.5 million for related estimated net losses.

55
Table of Contents
The following tables set forth selected quarterly unaudited consolidated statements of operations information for the fiscal years ended September24, 2006 and September25, 2005 (in thousands except per share amounts):
Fiscal Year 2006
Sales

Gross profit

Operating income
Other income (expense)
Interest expense



Net income




Fiscal Year 2005

Sales

Gross profit

Operating income
Other income (expense)
Interest expense



Net income




(15) Commitments and Contingencies

From time to time we are a party to legal proceedings including matters involving personnel and employment issues, personal injury, intellectual property and other proceedings arising in the ordinary course of business which have not resulted in any material losses to date. Although not currently anticipated by management, our results could be materially impacted by the decisions and expenses related to pending or future proceedings.
The Company has entered into Retention Agreements with certain executive officers of the Company or its subsidiaries which provide for certain benefits upon an involuntary termination of employment other than for cause after a Triggering Event. A Triggering Event includes a merger of the Company with and into an unaffiliated corporation if the Company is not the surviving corporation or the sale of all or substantially all of the Companys assets. The benefits to be received by the executive officer whose employment is terminated after a Triggering Event occurs include receipt of his or her annual salary through the one-year period following the date of the termination of employment and the immediate vesting of any outstanding stock options granted to such executive officer.

56
Table of Contents
Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Companys management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Companys management concluded that its internal control over financial reporting was effective as of September 24, 2006.
The Companys independent registered public accounting firm, Ernst & Young LLP, audited managements assessment of internal control over financial reporting and also independently assessed the effectiveness of our internal control over financial reporting. Ernst & Young LLP has issued their attestation report which is included in Part II, Item 8 of this Report on Form 10-K.
Item9B. Other Information.
Not applicable.

57
Table of Contents
PART III
Item10. Directors and Executive Officers of the Registrant.
The information required by this item about our Companys Executive Officers is included in Part I, Item 1. Business of this Report on Form 10-K under the caption Executive Officers of the Registrant. All other information required by this item is incorporated herein by reference from the registrants definitive Proxy Statement for the Annual Meeting of Shareholders to be held March 5, 2007 to be filed with the Commission pursuant to Regulation 14A.
The Company has adopted a Code of Conduct and Ethics for Team Members and Directors pursuant to section 406 of the Sarbanes-Oxley Act. A copy of our Code of Conduct and Ethics is publicly available on our Company website at http://www.wholefoodsmarket.com/investor/corporategovernance/codeofconduct.pdf. The information contained on our Web site is not incorporated by reference into this Report on Form 10-K.
Item11. Executive Compensation.
The information required by this item is incorporated herein by reference from the registrants definitive Proxy Statement for the Annual Meeting of Shareholders.
Item12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item about our Companys securities authorized for issuance under equity compensation plans as of September 24, 2006 is included in Part I, Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Report on Form 10-K. All other information required by this item is incorporated herein by reference from the registrants definitive Proxy Statement for the Annual Meeting of Shareholders.
Item13. Certain Relationships and Related Transactions.
Item14. Principal Accounting Fees and Services.

http://biz.yahoo.com/f/g/g.html

$ 2,252
$ 308,524
193,847

60,065
36,922
82,137
66,682
203,727
174,848
33,804
45,965
48,149

39,588
623,981
672,529
1,236,133
1,054,605
113,494
112,476
34,767
21,990
29,412
22,452
5,209

5,244
$ 2,042,996

$ 1,889,296

$ 49
$ 5,932
121,857
103,348
153,014
126,981

17,208
234,850

164,914
509,770
418,383
8,606
12,932
120,421
91,775
56

530
638,853

523,620

2006 2005
2006 2005
(99,964 )

6,975
4,405
349,260

486,299
1,404,143

1,365,676

$ 2,042,996

$ 1,889,296

$ 5,607,376
$ 4,701,289
$
3,647,734

3,052,184

1,959,642
1,649,105

1,421,968
1,223,473

181,244
158,864

37,421

37,035

319,009
229,733

(32 )
(2,223 )

20,736

9,623

339,713
237,133

135,885

100,782

$ 203,828

$ 136,351

$
1,147,872
2006 2005 2004
874,972
$ 1.46

$ 1.05

$
139,328

130,090

$ 1.41

$ 0.99

$
145,082

139,950

$ 2.45

$ 0.47

$
Shares
Outstanding
120,140

$ 423,297 $

4,184
59,518
478
16,375

35,583
12

334

124,814

535,107

Stock Stock in
Treasury

Common

Common

5,042
110,293

62,643

19,135
6,052

147,794

135,908

874,972

5,510
199,450
(2,005 )
(99,964 )

59,096

9,432
194

4,922

139,607

$ 1,147,872 $ (99,964
)

$ 203,828
$ 136,351
$

2006 2005 2004
156,223
133,759

6,291
15,886

9,432
19,135

(15,521 )
(27,873 )

62,643

(52,008 )

460
4,120

26,607
16,080

693
1,317

(17,720 )
(2,027 )

(32,200 )
(21,486 )

(7,849 )
(4,151 )

18,509
12,597

26,033
26,445

129,886

38,023

452,664

410,819

(208,588 )
(207,792 )

(131,614 )
(116,318 )

3,308

(16,332 )
(1,500 )

13,500

(555,095 )

362,209

(23,143 )
(10,132 )

(569,255
)
(322,242
)

(358,075 )
(54,683 )

222,030
85,816

(99,964 )

52,008

(5,680
)
(5,933
)

(189,681
)
25,200

(306,272 )
113,777

308,524

194,747

$ 2,252

$ 308,524

$

$ 607
$ 1,063
$
$ 70,220
$ 74,706
$

$
$
$
$ 4,922
$ 147,794
$
We report our results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2006, 2005 and 2004 were 52-week years.
Restricted cash primarily relates to cash held as collateral to support projected workers compensation obligations.
Our largest supplier, United Natural Foods, Inc., accounted for approximately 22%, 22% and 20% of our total purchases in fiscal years 2006, 2005 and 2004, respectively.

$ 8,320 $ 19,298 $ 12,850
5,714
We recognize revenue for sales of our products at the point of sale. Discounts provided to customers at the point of sale are recognized as a reduction in sales as the products are sold.

Carrying

Amount Value Amount
2006 2005
Carrying

EstimatedFair
We operate in one reportable segment, natural foods supermarkets. We currently have three stores in Canada and six stores in the United Kingdom. All of our remaining operations are domestic.

$ 39,993 $ 34,396
955,130 784,000
779,050 692,403
168,105 133,061
1,942,278 1,643,860
706,145 589,255
$ 1,236,133 $ 1,054,605
2006 2005

$ 774 $
$ 723
45,579 (11,833 )
32,597
2,242 (1,995
)
2,921
$ 48,595 $ (13,828
)
$ 36,241
2006 2005

Grosscarrying
amount amortization amount
2006 2005
Grosscarrying

Accumulated

$ 335 $ 300
5,714
8,320 12,850
8,655 18,864
49 5,932
$ 8,606 $ 12,932

$ 58 $ 162,827
93 227,490
89 247,284
74 246,028
39 243,331
25 3,636,926
378 $ 4,763,886
43
335
49
$ 286
Capital Operating

$ 120,774
$ 106,087
$
30,632

22,568

151,406

128,655

(13,350 )
(22,462 )

(2,171
)
(5,411
)

(15,521
)
(27,873
)

$ 135,885

$ 100,782

$
Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to income before income taxes as follows (in thousands):

$ 118,900
$ 82,997
$

(31 )
1,639

(1,352 )

(462 )
3,310

(9,962 )
(6,005 )

331

1,684

107,424
83,625

28,461

17,157

$ 135,885

$ 100,782

$

$ 43,303
$ 34,009
16,889
14,380

2,879
2004
2006 2005 2004
2006 2005
2006 2005
18
359
41,717
31,434
10,461
16,606
2,810

7,231

115,198
106,898
(13,271
)
(17,364
)
101,927

89,534

(21,858 )
(24,673 )
(313 )

(1,290 )
(1,841 )
(905
)
(980
)
(24,366
)
(27,494
)
$ 77,561

$ 62,040

$ 48,149
$ 39,588
29,412

22,452

$ 77,561

$ 62,040

We had short-term cash equivalent investments totaling approximately $10.1 million and $325.7 million at September24, 2006 and September25, 2005, respectively.
The Companys Board of Directors approved the following dividends during fiscal years 2006 and 2005 (in thousands, except per share amounts):

Total
2006 2005
Dividend
Date of Record Date of Payment

$ 0.15
January13,
2006 January23,2006 $ 20,918
2 13-Jan-06 23-Jan-06 277,904
0.15 14-Apr-06 24-Apr-06 21,004
0.15 14-Jul-06 24-Jul-06 21,186

$ 0.1 7-Jan-05 17-Jan-05 $ 12,088
0.13 15-Apr-05 25-Apr-05 16,345
0.13 15-Jul-05 25-Jul-05 16,834
0.13
October14,
2005 October24,2005 17,063
A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except per share amounts):

$ 203,828 $ 136,351 $ 129,512
283 2,539 4,697

$ 204,111 $ 138,890 $ 134,209

139,328 130,090 122,648

363 3,414 6,562
5,391 6,446 6,244

145,082 139,950 135,454

2006 2005 2004

perShare Amount
Date of Record Date of Payment
$ 1.46 $ 1.05 $ 1.06

$ 1.41 $ 0.99 $ 0.99

Number Weighted
of Options Average
Outstanding Remaining
ContractualLi
fe
15,728
$ 17.53
5,240
39.54
(4,154 )
14.13
(674
)
23.9

16,140
$ 25.69
12,112
59.82
(4,996 )
21.64
(711
)
37.33

22,545
$ 44.58
1,444
69
(5,466 )
36
(202 )
56.57
(46
)
64.52

18,275

$ 48.82 4.74 $

18,031

$ 48.55 4.75 $

16,551

$ 47.11 4.75 $

Aggregate
Average Intrinsic
ExercisePrice Value

Weighted


WeightedAverage
Remaining
Outstanding Life (in Years)
$ 20.48 1,554 1.19 $ 11.38
38.31 2,721 3.17 26.16
39.61 2,632 4.61 39.61
54.17 4,753 5.57 53.56
66.81 5,206 5.97 66.69
73.14 1,409 4.62 69
18,275 4.74 $ 48.82
Share-based compensation expense related to vesting stock options recognized during fiscal year 2006 totaled approximately $4.6 million.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2006 2005 2004
1.26 %
0.84 %
0.76 %
5.04 %
4.14 %
4.72 %
29.4 %
48.3 %
49.48 %
3.22
2.1
3.3

$ 136,351
$ 129,512
15,309

(179,616
)
(23,888
)
$ (27,956
)
$ 105,624

To ExercisePrice
2005 2004
Number
Weighted
Exercise Prices Average
Options Outstanding
Rangeof

$ 1.05
$ 1.06
0.12

(1.38
)
(0.20
)
$ (0.21
)
$ 0.86

$ 0.99
$ 0.99
0.12

(1.31
)
(0.17
)
$ (0.20
)
$ 0.82

Pro forma disclosures for fiscal year 2006 are not presented because the amounts are recognized in the Consolidated Statement of Operations.
The following tables set forth selected quarterly unaudited consolidated statements of operations information for the fiscal years ended September24, 2006 and September25, 2005 (in thousands except per share amounts):

$ 1,666,953
$ 1,311,520
$
1,092,018

848,020

Quarter Quarter Quarter
Second

Third First

574,935
463,500

424,438
330,470

50,889
43,421

8,491

7,324

91,117
82,285

(3 )

6,082

4,068

97,196
86,353

38,878

34,542

$ 58,318

$ 51,811

$
$ 0.42

$ 0.37

$
$ 0.4

$ 0.36

$
$ 2.15

$ 0.15

$

$ 1,368,328
$ 1,085,158
$
895,486

697,686

472,842
387,472

348,380
276,313

40,401
34,773

6,599

10,265

77,462
66,121

(1,708 )
(342 )

1,194

2,113

76,948
67,892

30,778

27,158

$ 46,170

$ 40,734

$
$ 0.37

$ 0.31

$
Quarter Quarter Quarter

Third First

Second
$ 0.34

$ 0.29

$
$ 0.1

$ 0.13

$

3,864,950
2,523,816

1,341,134
986,040
119,800
18,648

216,646
(7,249 )
6,456

215,853
86,341

129,512

2004
1.06

122,648

0.99

135,454

0.3

$ 1,624

$ 320,055

129,512

856

88

(515
)

429
129,512

(37,089 )

2,053

412,478

Income (Loss)

Accumulated

Retained

Other Earnings

Comprehensive

136,351

1,893

1,063

(604
)

2,352
136,351

(62,530 )

4,405

486,299

203,828

2,494

76

2,570
203,828

(340,867 )

$ 6,975

$ 349,260

129,512
2004
115,157
5,769

(682 )
35,583

7,551
11,109
(1,133 )
(19,158 )
(27,868 )
(2,940 )
12,515
29,646
35,279

330,340

(156,728 )
(109,739 )

(13,500 )

(26,790 )
(18,873 )
1,332

(324,298
)
(27,728 )
59,518

(8,864
)
22,926

28,968
165,779

194,747

2,127
60,372
16,375
293
$ 34,635
5,828
EstimatedFair
Value
2005

$
(11,827 )
(2,425
)
$ (14,252
)

Accumulated

amortization
2005

70,750
16,272

87,022

284
(965
)
(681
)
86,341

75,548
2,310

(5,357 )
(1,467
)
71,034
15,307

86,341

2004
2004
243,726
243,691
239,831
Aggregate
Intrinsic
Value

Exercisable
1,554 $ 11.38
2,683 26.13
2,596 39.61
4,588 53.77
5,130 66.74
n/a
16,551 $ 47.11
ExercisePrice
Number
Weighted
Average
Options Exercisable


1,337,886
$ 1,291,017
866,260

841,436

Fourth

Quarter Quarter
Third

471,626
449,581
335,555
331,505
43,955
42,979
7,860

13,746

84,256
61,351

(8 )
(21 )
5,581

5,005

89,829
66,335
35,931

26,534

53,898

$ 39,801

0.38

$ 0.29

0.37

$ 0.28

0.15

$

1,132,736
$ 1,115,067
733,931

725,081

398,805
389,986
285,804
312,976
39,618
44,072
8,777

11,394

64,606
21,544

(163 )
(10 )
2,868

3,448

67,311
24,982
26,924

15,922

40,387

$ 9,060

0.31

$ 0.07

Quarter Quarter
Third

Fourth
0.29

$ 0.06

0.13

$ 0.13

$ 744,976

129,512
856
88
(515
)
129,941
(37,089 )
59,518
16,375
35,583
334

949,638

Equity
Total

Shareholders
136,351
1,893
1,063
(604
)
138,703
(62,530 )
110,293
62,643
19,135
147,794

1,365,676

203,828
2,494
76

206,398
(340,867 )
199,450
(99,964 )
59,096
9,432
4,922

$ 1,404,143

Wholefoods Market
Income Statement ($000)
PERIOD ENDING Sep 24, 2006 Sep 25, 2005 Sep 26, 2004
Net Sales 5,607,376.00 4,701,289.00 3,864,950.00
COGS 3,647,734.00 3,052,184.00 2,523,816.00
Selling General and Administrative 1,484,410.00 1,285,613.00 1,004,089.00
Depreciation and Amortization 156,223.00 133,759.00 115,157.00
Income from Continuing Operations 319,009.00 229,733.00 221,888.00
Total Other Income/Expenses Net 20,736.00 9,623.00 6,456.00
Earnings Before Interest And Taxes 339,745.00 239,356.00 228,344.00
Interest Expense 32.00 2,223.00 7,249.00
Income Before Tax 339,713.00 237,133.00 221,095.00
Income Tax Expense 135,885.00 100,782.00 88,438.00
Net Income 203,828.00 136,351.00 132,657.00
Dividends 358,075
Add To Retained Earnigs (154,247.00)
Wholefoods Market
Income Statement ($000)
PERIOD ENDING Sep 24, 2006 Sep 25, 2005 Sep 26, 2004
Assets
Current Assets 623,981 672,529 485,572
Net Fixed Assets 1,419,015 1,216,767 1,062,144
Total Assets 2,042,996 1,889,296 1,547,716
Liabilities
Current Liabilities 509,770 418,383 334,950
Long Term Debt 129,083 105,237 244,111
Total Liabilities 638,853 523,620 579,061
Stockholders' Equity
Common stock and paid-in surplus 1,054,883 879,377 537,160
Retained Earnings 349,260 486,299 431,495
Total Stockholder Equity 1,404,143 1,365,676 968,655
Total Stockholder Equity and Total Liabilities 2,042,996 1,889,296 1,547,716
TRUE TRUE TRUE
2006 analysis
Cash flow from assets = Cash flow from operations - Net capital spending -
Cash flow from operations = EBIT + Depreciation -
Net capital spending = End net fixed assets - Beg net fixed assets +
$192,714.00
2006 Current Assets 2005 Current Assets 2004 Current Assets
Change in NWC
Taxes

Depreciation
141,547.00 (23,814.00) 165,361.00
Cash flow from assets = Cash flow from operations - Net capital spending -
141,547.00 360,083.00 358,471.00
Cash flow from operations = EBIT + Depreciation -
360,083.00 339,745.00 156,223.00
Net capital spending = End net fixed assets - Beg net fixed assets +
358,471.00 1,419,015.00 1,216,767.00
(139,935.00) 114,211.00 254,146.00
(23,814.00) 32.00 23,846.00
Cash flow to stockholders = Dividends - Net new equity +
165,361.00 $358,075.00 $38,467.00
Change in NWC
(139,935.00)
Taxes
135,885.00
Depreciation
156,223.00
Reduction in Retained Earnings
(154,247.00)
Assumptions (in millions):
Name: Dole Cola Inc.
Year 2006
Sales $600
COGS $300.00
Depreciation Expense $150.00
Interest Paid $30.00
Tax Rate 34%
Dividends $30.00
End Fixed Assets $750.00
Beg Fixed Assets $500.00
Beg CA $2,130.00
Beg CL $1,620.00
End CA $2,260.00
End CL $1,710.00
Dole Cola Inc.
Income Statement (in mils.)
For the Year Ended 2006
Sales
COGS
Earnings Before Interest and Tax
Interest Paid
Taxable Income
Taxes
Net Income
Dividends
Addition to Retained Earnings
Question 1
Question 2
Change in Fixed Assets =
6 =
4 =
3 =
. Net capital spending =
2 =
Change in NWC =
1 =
Cash flow to creditors (bondholders) =
7 =
Cash flow to stockholders (owners) =
5 =
Cash flow to creditors (bondholders) + Cash flow to stockholders (owners)
+
Operating cash flow - Net capital spending -
- -
Earnings before interest and taxes (EBIT) + Depreciation -
+ -
Ending net fixed assets - Beginning net fixed assets +
- +
Ending NWC - Beginning NWC
-
Interest paid - Net new borrowing (end long-term debt - beg LTD)
-
Dividends paid -
Net new equity raised (end Common stock & Paid-in
surplus - beg CS & PIS)
-
Change in net working capital (NWC)
Taxes
Depreciation
Assumptions (in millions):
Name: Dole Cola Inc.
Year 2003
Sales $600
COGS $300.00
Tax Rate 34%
Dividends $30.00
End Fixed Assets $750.00
Beg Fixed Assets $500.00
Beg CA $2,130.00
Beg CL $1,620.00
End CA $2,260.00
End CL $1,710.00
Dole Cola Inc.
Income Statement (in mils.)
For the Year Ended 2003
Sales $600
COGS $300.00
Gross Profit $300.00
Earnings Before Interest and Tax $150.00
Taxable Income $120.00
Taxes $41.00
Net Income $79.00
Dividends $30.00
Addition to Retained Earnings $49.00
Question 1 Operating cash flow + $259
Question 2
Because depreciation is a non cash
expense and interest goes into a
different calculation, it is cash to
bondholders
Change in Fixed Assets = $250.00
6 (181.00) =
4 (181.00) =
3 259.00 =
. Net capital spending =
2 400.00 =
Change in NWC =
1 40.00 =
(bondholders)
=
7 (211.00) =
(owners)
=
5 30.00 =
(bondholders)
+ Cash flow to stockholders (owners) True!
(211.00) + 30.00
Operating cash flow - Net capital spending -
Change in net working capital
(NWC)
259.00 - 400.00 - 40.00
Earnings before interest and
taxes (EBIT)
+ Depreciation - Taxes
150.00 + 150.00 - 41.00
Ending net fixed assets - Beginning net fixed assets + Depreciation
750.00 - 500.00 + 150.00
Ending NWC - Beginning NWC True
550.00 - 510.00
Interest paid -
Net new borrowing (end long-term
debt - beg LTD)
Not True
30.00 - (241.00)
Dividends paid -
Net new equity raised (end
Common stock & Paid-in surplus -
beg CS & PIS)
True
30.00 - 0.00
True
True
True
237324758.xls.ms_office - STP 2.1 (T)
Assumptions Rasputin Corporation
Ra
sp
Name: Rasputin Corporation Income Statement
Ba
lan
Year 1 12/31/2009 For The Year Ended 2010
De
ce
Year 2 12/31/2010 Sales Assets
Tax Rate 34% Cost of goods sold
Statements Income Statement Depreciation
Balance Sheet Earnings before interest and tax
Requirements: Interest
Prepare an Income Statement for 2010 Done Taxable income
Prepare an Balance Sheet for 2009 and 2010 Done Taxes
Calculate cash flows from assets for 2010 0.00 0.00 Net Income
Calculate cash flows to stockholders 2010 0.00 Dividends
Account Name 2009 2010 Addition to retained earnings
Sales $3,790 $3,990
Cost of goods sold 2,043 2,137
Depreciation 975 1,018
Interest 225 267
Dividends 200 225
Current assets 2,140 2,346
Net fixed assets 6,770 7,087
Current liabilities 994 1,126
Long-term debt 2,869 2,956
Page 239 of 264
Rasputin Corporation
Balance Sheet
2009 2010 2009 2010
Current assets Current liabilities
Net fixed assets Long-term debt
Total Liabilities
Change in Common Stock and Paid-in surplus
Change in Retained Earnings
Total Owners' Equity
Total Assets Total Liabilities and Owners' Equity
Cash flow from operations =
Net capital spending =
Change in NWC =
Cash flow to creditors =
Cash flow to stockholders =
Page 240 of 264
Cash flow to creditors + Cash flow to stockholders True
Cash flow from operations - Net capital spending - Change in NWC
EBIT + Depreciation - Taxes
End net fixed assets - Beg net fixed assets + Depreciation
End NWC - Beg NWC
Interest - Net new borrowing
Dividends - Net new equity
Page 241 of 264
237324758.xls.ms_office - STP 2.1 (an)
Assumptions Rasputin Corporation
Ra
sp
Name: Rasputin Corporation Income Statement
Ba
lan
De
ce
Year 2 12/31/2010 Sales $3,990.00 Assets
Tax Rate 34% Cost of goods sold 2,137.00
Statements Income Statement Depreciation 1,018.00
Balance Sheet Earnings before interest and tax 835.00
Requirements: Interest 267.00
Prepare an Income Statement for 2010 Done Taxable income 568.00
Prepare an Balance Sheet for 2009 and 2010 Done Taxes 193.00
Calculate cash flows from assets for 2010 251.00 251.00 Net Income $375.00
Calculate cash flows to stockholders 2010 71.00 Dividends $225.00
Account Name 2009 2010 Addition to retained earnings $150.00
Sales $3,790 $3,990
Cost of goods sold 2,043 2,137
Depreciation 975 1,018
Interest 225 267
Dividends 200 225
Current assets 2,140 2,346
Current liabilities 994 1,126
Long-term debt 2,869 2,956
Page 242 of 264
Rasputin Corporation
Balance Sheet
2009 2010 2009 2010
Current assets $2,140.00 $2,346.00 Current liabilities $994.00 $1,126.00
Net fixed assets 6,770.00 7,087.00 Long-term debt 2,869.00 2,956.00
Total Liabilities 3,863.00 4,082.00
Change in Common Stock and Paid-in surplus 154.00
Change in Retained Earnings 150.00
Total Owners' Equity 5,047.00 $5,351.00
Total Assets $8,910.00 $9,433.00 Total Liabilities and Owners' Equity $8,910.00 $9,433.00
251.00
251.00
Cash flow from operations =
1,660.00
Net capital spending =
1,335.00
Change in NWC =
74.00
Cash flow to creditors =
180.00
Cash flow to stockholders =
71.00
Page 243 of 264
Cash flow to creditors + Cash flow to stockholders True
180.00 71.00
Cash flow from operations - Net capital spending - Change in NWC
1,660.00 1,335.00 74.00
EBIT + Depreciation - Taxes
835.00 1,018.00 193.00
End net fixed assets - Beg net fixed assets + Depreciation
7,087.00 6,770.00 1,018.00
End NWC - Beg NWC
1,220.00 1,146.00
Interest - Net new borrowing
267.00 87.00
Dividends - Net new equity
$225.00 $154.00
Page 244 of 264
237324758.xls.ms_office - Critical Thinking (T)
2.1
2.2
2.6
2.8
2.9
Page 245 of 264
237324758.xls.ms_office - Critical Thinking (an)
2.1
Liquid assets can be converted to cash quickly so that bills can be paid or profitable assets
can be purchased, however, cash earns a small return. On the other hand, illiquid assets
such as buildings or business segments tend to earn a higher return, although they are
harder to turn to cash and may loose some value if it is required that one sell quickly. In the
2007-2010 financial crisis, banks held many bad loans which stop providing cash flows and
when the panic set in, banks could not sell assets to get cash or borrow money to get cash,
so they ran out of cash or "liquidity".
2.2
Because accountants use accrual accounting. Revenues are recorded when earned and
expenses are recorded when incurred or when the expense is matched to the revenue it
helped to create. Although revenues and expenses are recorded, there may not be a
contemporaneous cash flow associated with it. In particular, the depreciation expense is a
large non-cash expense (caused by the matching principal) that, in finance, must be added
back into the accounting income in order to estimate cash flows.
2.6
It depends. If a firm is growing quickly and buying many profitable assets, the cash flow from
assets could be negative - in essence, the cash to creditors and stockholders would be
negative (cash comes in from equity and debt so business can buy assets), which means that
they are investing cash in the business because they think that the firm will be profitable in
the future. On the other hand, if the firm continues to have earning losses, this may not be a
good sign.
2.8
A negative NWC could mean that the firm is managing its inventory or receivables more
efficiently - they sold old inventory or they collected more Accounts Receivables than they
recorded new ones. A negative NCS could mean that the firm has sold more assets than it
has purchased.
Page 246 of 264
237324758.xls.ms_office - Critical Thinking (an)
2.9
Sure, if the new equity issued is greater than the dividends paid, or the new debt issued is
greater than the interest paid.
Page 247 of 264
237324758.xls.ms_office - Problem 1 (T)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
A B C D E
Assumptions
Name A Inc.
CA
NFA
CL
LTD
Solve for:
NWC =
A Inc.
Balance Sheet
CA CL
NFA LTD
Owners Equity
Total Assets Total Liabilities + Owners' Equity
Page 248 of 264
237324758.xls.ms_office - Problem 1 (an)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
A B C D E
Assumptions
Name A Inc.
CA 2,170.00
NFA 9,300.00
CL 1,350.00
LTD 3,980.00
Solve for:
NWC =
A Inc.
Balance Sheet
CA 2,170.00 $ CL 1,350.00 $
NFA 9,300.00 LTD 3,980.00 $
Owners Equity 6,140.00
Total Assets 11,470.00 $ Total Liabilities + Owners' Equity 11,470.00 $
Page 249 of 264
237324758.xls.ms_office - Problem 2 & 3 & 4 (T)
Assumptions
Name Lifeline Inc.
Sales
Costs
Interest Expense
Tax Rate
Dividends
Shares of common
stock outstanding
Lifeline Inc.
Income Statement
For The Year Ended 20xx
Sales
Costs
EBIT
Interest Expense
Taxable Income
Tax
Net Income
Dividends
Addition to Retained Earnings
EPS
DPS
Page 250 of 264
237324758.xls.ms_office - Problem 2 & 3 & 4 (an)
Assumptions
Name Lifeline Inc.
Sales 585,000.00
Costs 273,000.00
Depreciation Expense 71,000.00
Interest Expense 38,000.00
Tax Rate 35%
Dividends 36,000.00
Shares of common
stock outstanding 40,000.00
Lifeline Inc.
Income Statement
For The Year Ended 20xx
Sales 585,000.00
Costs 273,000.00
Depreciation Expense 71,000.00
EBIT 241,000.00
Interest Expense 38,000.00
Tax 71,050.00
Net Income 131,950.00
Dividends 36,000.00
Addition to Retained Earnings 95,950.00
EPS 3.29875
DPS 0.9
Page 251 of 264
Assumptions
Tax Rate Table
LOOKUP COLUMN Income To Tax Rate
- 50,000 15.00%
50,001 75,000 25.00%
75,001 100,000 34.00%
100,001 335,000 39.00%
335,001 10,000,000 34.00%
10,000,001 15,000,000 35.00%
15,000,001 18,333,333 38.00%
18,333,334 + 35.00%
Taxable Income = $275,000.00 Calculate tax for
entire year
$50,000*15.00%
($75,000-$50,000)*25.00%
($100,000-$75,000)*34.00%
($275,000-$100,000)*39.00%
Average Tax Rate =
Cumulative Tax From Previous Bracket
7,500
13,750
22,250
113,900
3,400,000
5,150,000
6,416,667
$50,000*15.00%
($75,000-$50,000)*25.00%
($100,000-$75,000)*34.00%
($275,000-$100,000)*39.00%
Average Tax Rate =
0 15.00%
50,000 25.00% 7,500
75,000 34.00% 13,750
100,000 39.00% 22,250
335,000 34.00% 113,900
10,000,000 35.00% 3,400,000
15,000,000 38.00% 5,150,000
18,333,333 35.00% 6,416,667
Assumptions
Tax Rate Table
LOOKUP COLUMN Income To Tax Rate
- 50,000 15.00%
50,001 75,000 25.00%
75,001 100,000 34.00%
100,001 335,000 39.00%
335,001 10,000,000 34.00%
10,000,001 15,000,000 35.00%
15,000,001 18,333,333 38.00%
18,333,334 + 35.00%
Taxable Income = $275,000.00 Calculate tax for
entire year
$50,000*15.00%
($75,000-$50,000)*25.00%
($100,000-$75,000)*34.00%
($275,000-$100,000)*39.00%
Average Tax Rate =
Cumulative Tax From Previous Bracket
7,500
13,750
22,250
113,900
3,400,000
5,150,000
6,416,667
$50,000*15.00% 7,500.00
($75,000-$50,000)*25.00% 6,250.00
($100,000-$75,000)*34.00% 8,500.00
($275,000-$100,000)*39.00% 68,250.00
90,500.00 90500
Average Tax Rate = 0.32909
Marginal Tax Rate for next dollar = 0.39000
0 15.00%
50,000 25.00% 7,500
75,000 34.00% 13,750
100,000 39.00% 22,250
335,000 34.00% 113,900
####### 35.00% #######
90,500.00 ####### 38.00% #######
####### 35.00% #######
237324758.xls.ms_office - Problem 9 (T)
Assumptions
Name Rotweiler Obedience School
Date 1 12/31/2009
Date 2 12/31/2010
Income Statement
Balance Sheet Net Fixed Assets, December 31, 2009
Balance Sheet Net Fixed Assets, December 31, 2010
2010 Income Statement Depreciation Expense
Page 258 of 264
237324758.xls.ms_office - Problem 9 (an)
Assumptions
Name Rotweiler Obedience School
Date 1 12/31/2009
Date 2 12/31/2010
Income Statement
Balance Sheet Net Fixed Assets, December 31, 2009 1,725,000.00
Balance Sheet Net Fixed Assets, December 31, 2010 2,040,000.00
Net Capital Spending for 2010 636,000.00
Page 259 of 264
237324758.xls.ms_office -Problem 21 (T)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
A B C D E F G
Assumptions Titan Football Manufacturing
Name: Titan Football Manufacturing Income Statement
Year 2 12/31/2010 Sales
Tax Rate 35% Cost of goods sold
Statements Income Statement Depreciation expense
Balance Sheet Earnings before interest and tax
Account Name 2009 2010 Interest expense
Sales $19,780 Taxable income
Cost of goods sold 13,980 Taxes
Depreciation expense 2,370 Net Income
Interest expense 345
Dividends paid 550 Dividends
Current assets 2,940 3,280 Addition to retained earnings
Current liabilities 2,070 2,160
Long-term debt
Requirements:
Net Income for 2010
Operating Cash Flow for 2010
Calculate cash flows from assets for 2010
Why?
If no new debt was issued during the year, what is the cash
flow to creditors 2010?
Calculate cash flows to stockholders 2010
New Equity
Explain the negative and positive signs
Page 260 of 264
237324758.xls.ms_office -Problem 21 (T)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
H I J K L M N O
Cash flow from operations = EBIT + Depreciation expense - Taxes
Net capital spending = End net fixed assets - Beg net fixed assets + Depreciation expense
Cash flow to creditors = Interest expense - Net new borrowing
Page 261 of 264
237324758.xls.ms_office -Problem 21 (an)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
A B C D E F G
Assumptions Titan Football Manufacturing
Name: Titan Football Manufacturing Income Statement
Year 2 12/31/2010 Sales $19,780.00
Tax Rate 35% Cost of goods sold 13,980.00
Statements Income Statement Depreciation expense 2,370.00
Balance Sheet Earnings before interest and tax 3,430.00
Account Name 2009 2010 Interest expense 345.00
Sales $19,780 Taxable income 3,085.00
Cost of goods sold 13,980 Taxes 1,080.00
Depreciation expense 2,370 Net Income $2,005.00
Interest expense 345
Dividends paid 550 Dividends $550.00
Current assets 2,940 3,280 Addition to retained earnings $1,455.00
Current liabilities 2,070 2,160
Long-term debt
Requirements:
Net Income for 2010 $2,005.00
Operating Cash Flow for 2010 4,720.00
Calculate cash flows from assets for 2010 (440.00)
Why?
Because the firm thinks that it has found
profitable assets to purchase and so it
has purchased $4,910 worth. In addition,
the NWC capital has gone up
significantly. Both of these asset
increases has used up and exceeded
the operating cash flow.
If no new debt was issued during the year, what is the cash
flow to creditors 2010? 345.00
Calculate cash flows to stockholders 2010 (785.00)
New Equity 1,335.00
Page 262 of 264
26
27
A B C D E F G
Explain the negative and positive signs
The firm is still paying $345 to creditors
for past debt, but has issued $1,335 of
new equity to augment the Cash Flow
From Operations of $4,720 -- all with the
end result of purchasing new assets
The firm had positive earnings in an
accounting sense (NI > 0) and had
positive cash flow from operations. The
firm invested $250 in new net working
capital and $4,910 in new fixed assets.
The firm had to raise $440 from its
stakeholders to support this new
investment. It accomplished this by
raising $1,335 in the form of new equity.
After paying out $550 in the form of
dividends to shareholders and $345 in
the form of interest to creditors, $440
was left to just meet the firms cash flow
needs for investment.
Page 263 of 264
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H I J K L M N O
(440.00)
Cash flow from operations = EBIT + Depreciation expense - Taxes
4,720.00
Net capital spending = End net fixed assets - Beg net fixed assets + Depreciation expense
4,910.00
250.00
Cash flow to creditors = Interest expense - Net new borrowing
345.00
(785.00) $550.00
Page 264 of 264

Busn 233 CH 02

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Copyright:

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Busn 233 CH 02

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Copyright:

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Financial Statements:

Total current assets

Total current liabilities

Total shareholders equity

Commitments and contingencies

Total liabilities and shareholders equity

Income before income taxes

Weighted average shares outstanding

Diluted earnings per share

Weighted average shares outstanding, diluted basis

Dividends declared per share

Balances at September26, 2004

Balances at September25, 2005

Balances at September24, 2006

Net cash provided by operating activities

Cash flows from investing activities

Net cash used in investing activities

Cash flows from financing activities

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

Cash and cash equivalents at end of year

Supplemental disclosures of cash flow information:

Total Long-term debt

Long-term debt, less current installments

Less amounts representing interest

Net present value of capital lease obligations

Long-term capital lease obligations, less current installments

Total current tax

Deferred federal income tax

Total deferred income tax

Total income tax expense

Total federal income taxes

Total income tax expense

Gross deferred tax assets

Deferred tax liabilities:

Net deferred tax asset

Net deferred tax asset

Adjusted net income (numerator for diluted earnings per share)

Potential common shares outstanding:

Diluted earnings per share

Outstanding options at September26, 2004

Outstanding options at September25, 2005

Outstanding options at September24, 2006

Vested/expected to vest at September24, 2006

Exercisable options at September24, 2006

Pro forma net income (loss)

Basic earnings per share:

Pro forma basic earnings (loss) per share

Diluted earnings per share:

Pro forma diluted earnings (loss) per share

Income before income taxes

Basic earnings per share

Diluted earnings per share

Dividends declared per share

Fiscal Year 2005

Income before income taxes

Basic earnings per share

Dividends declared per share

(15) Commitments and Contingencies

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