Benefits of Walmart’s Accounting System and Costing System

Walmart’s Accounting System, including its information and costing systems, is among the most sophisticated retail store management systems worldwide. Walmart is the largest multinational retailer in the world, operating discounted departmental and warehouse stores. The corporation was formed in 1962 by Sam Walton and has over 11,000 stores in over 27 countries (Walmart 2018 Annual Report).

Walmart’s Accounting System is a stable information system that is so advanced that the American Defense system used it for logistics during the Iraq war. Walmart’s Accounting System is considered the world’s second-best computer system after NASA (Bromiley & Rau, 2016).

Walmart’s Accounting System

Walmart's accounting system, WalMart costing systemWalmart’s Accounting System

Walmart’s accounting system and its related information systems have helped Walmart gain a competitive edge over its competitors. The most beneficial of these information systems is Walmart’s accounting system.

As a retail corporation, Walmart collects, stores sales, and purchase information, in a centralized accounting information system that is connected to all stores. Walmart’s accounting system handles daily transactions from each of its stores. Walmart’s Accounting System

Uses of Walmart’s Accounting System

Walmart’s Accounting Information System (AIS) allows the firm to make accurate financial sales and purchases of every store, aiding the decision-making process at the operational level(Bromiley & Rau, 2016). Another role includes helping managers to plan and monitor sales and the cash system.

Walmart uses accounting information from its management accounting system (MAS) to streamline its planning, controlling and other management-related activities. According to Plunkett, Attner, and Allen (2011), the system offers alternatives related to integrated accounting information that aids management in establishing the most effective strategy to enhance organizational effectiveness.

The dissemination of Managerial accounting information is essential in the budgeting process of all departments by facilitating their integration in all activities within the firm. Gilbertson and Lehman (2008) assert that Walmart’s accounting system consists of the Vision Suite software which has different financial elements that include the general ledger, cheque writing and integration of external accounting systems globally.

Vision suite software is more affordable in the automatic generation of accounting documents from Walmart’s accounting system. This allows management to access important reports that help them in the decision making process.

Nonetheless, Gilbertson and Lehman (2008) noted that the main limitation is the susceptibility to hacking and computer viruses. This means that when the company lacks appropriate control and security mechanisms, the company’s confidentiality is affected.

The paper provides a literature review focusing on Walmart’s accounting system, which includes its costing system, a significant section of the company’s profitability.

Another element analyzed in the literature review is Walmart’s accounting and financial practices, with the paper analyzing the specific procedures and strategies of Walmart’s accounting system, including; Walmart”s budgeting, accounting and costing, and capital decision making presented through the capital structure.

The paper adopted a systematic literature review to establish the strengths and weaknesses of Walmart’s accounting system. The systematic literature review is essential in understanding Walmart’s Management Accounting System (MAS) in terms of how Walmart’s data is collected, stored, processed, and disseminated to different parties.

The case description and analysis section shall link Walmart’s budgeting to the performance measurement system, analyses the costing system used at the company and evaluate the system. More so, the analysis of the strengths and limitations of Walmart’s accounting system was done based on the accounting concepts.

On the other hand, the capital process relates to the kind of investment appraisal techniques implemented at Walmart, which the case analysis section addressed. It is important to give a specific project example undertaken by Walmart for clarification. This will also involve credit ratings and other financial-related decisions that affect the firm’s capital structure (Plunkett et al. 2011).

Lastly, the discussion section included measuring the performance of Walmart’s accounting system based on the case analysis of elements such as the capital structure, credit ratings, strengths and limitations of the Walmart’s accounting system.

Walmart’s Accounting Information System

The Accounting Information System (AIS) at Walmart uses an e-business model essential in aiding online purchases on the firm’s website, alongside an effective delivery system supporting products delivery at requested times. Moreover, the accounting information system helps in collecting information on purchases and receivership of the goods, thus supporting the effective management of inventories.

In 2018, Walmart bypassed Apple to become the globe’s third-biggest online retailer, triggered by a quarterly e-commerce growth of 43% through the acquisition of major digital brands resonating with the young shoppers (Bromiley & Rau, 2016).

In 2019, the company has continued with its growth plans through strategic partnerships, brand acquisitions and heavy investment in Omnichannel framework an indication of reinvention to dominate against Amazon.

The retail firm has managed to integrate over 4,700 physical stores into an operational Omnichannel framework that improves yearly. The desire to fill the gap between Amazon and Walmart have been through the firm’s innovations to reach massive clients. Walmart’s Accounting System

Walmart’s E-Business Model

Walmart’s e-business model relates to a framework developed by Casadesus-Masanell and Ricart (2010) focusing on two main elements that include choices made by top leadership and the consequences.

Walmart’s choices include those based on policies, assets and assets governance, with Ulrich et al. (2011), defining policy choices as courses of action every company adopts for every element of its operation. An example includes opposing the formation of unions’ emergence, establishing plants in rural regions and giving good monetary incentives.

The asset choices include the development of tangible resources such as manufacturing assets, satellite communication system between offices or using a specific airline. According to Bromiley and Rau (2016), governance choices at Walmart include the organizational structure used to develop contractual plans conferring decision rights to policies or assets.

An example includes a model where Walmart through the choice element, include having some assets as a fleet of truck, which is a governance choice to own a fleet. Walmart’s Accounting System

The Costing System of Walmart’s Accounting System

Walmart’s costing system concentrates on inventory management, which is used to measure its profitability. Walmart has adopted varied costing methods, where when working on reducing inventory costs and establishing accurate product costs “Last In First Out” (LIFO) and “First In First Out” (FIFO) are applied.

On the other hand, Walmart has implemented retail accounting method when selling inventories at low cost or market value (Drury, 2006). This is essential in enhancing the operation’s effectiveness, with Walmart being a retail business, thus the need to gain a competitive edge over the rest.

Walmart’s 2012 annual report showed how the firm used LIFO to calculate the weighting average cost for US products, with international operations inventories using FIFO (Walmart Annual Report, 2012).

According to Drury (2006), the different costing methods enhance Walmart’s effectiveness when it comes to management cost. Over the Years, Walmart has relied on ‘everyday low-cost approach’ (EDLC) in its costing, allocating different products, different costs.

This has been possible through the implementation of “Activity Based Costing” (ABC) system that makes it easy for the firm to understand its cost structure and cost determinants.

Accordingly, the ABC structure prioritizes the price structure by showing actual work accomplished based on accurate production, thus aiding in management accounting. Leitner (2007) explain that Walmart’s top leadership uses the ABC approach to comprehend the total cost view; hence, the ability to reduce overhead costs through the elimination of cost determinants.

The major limitation of Walmart’s costing structure includes costs surpassing profits and the need for in-depth data input from different departments, hence a high risk of data inputs failing. Managing the system remains high because of a high-cost pool volume, with the company being large in terms of product lines, varied machine arrangements and huge production environment (Drury, 2006).

Capital Decision-Making

Walmart evaluates its investment appraisal methods to make better capital decisions through the combination of financial and strategic project elements. Capital investment decisions rely on financial features that include income growth, returns on investment, but a major challenge involves the current global expansion and profitability (Walmart Annual Report, 2012).

An effectiveness of Walmart’s accounting system can be determined by analyzing its ability to prioritize the collection of project information that includes past performance, actual risks, costs, and benefits, before starting a project.

The next step includes project evaluation using cost-benefit analysis, IRR and NPV to evaluate the feasibility of a project. According to Brigham and Daves (2012), Walmart implements ‘discounted cash flow’ (DCF), an investment appraisal method that aids in the capital decision-making procedure.

When selecting a project Walmart implements NPV and IRR methodology to evaluate an alternative. The prioritized factors include revenue increment, time, and firm’s brand reputation, which plays a role in optimizing capital resource utilization.

An example of such a product includes the California solar project that used the DCF method to determine whether to invest capital in the project or not. After DCF implementation, the company must determine the average payback time for all energy-saving projects that took over six months, obtaining an annual return investment of 190% on profitable projects (Ailworth, 2012). Walmart’s Accounting System

Walmart’s Capital Structure

When acquiring capital, Walmart prefers long-term sustainability and stable performance, with the cash flow being the main capital source for long-term improved performance. Before determining the best financial capital source, Walmart considers many factors such as market position, market trends, financial situation, implemented credit policy and stakeholder needs.

According to Ulrich (2011), Walmart implements a financing cost to designate capital to run its business operations. With a good credit rating, Walmart has a unique capital structure that allows good ratings at financial institutions.

Methodology

The methodology used for the paper includes collecting information from annual reports presented by Walmart from 2012 to 2018. This was essential in having a clear picture of the firm’s growth, managerial practices, and accounting processes.

Other sources include literature reviews by scholars that focused on costing procedures, managing accounting systems and capital structure, focusing on Walmart as a case study, as well as other related companies,  to compare and contrast the strengths and limitations of Walmart’s accounting system.

Walmart’s Accounting and Inventory Management System

Walmart implemented a new accounting system to aid its financial system, aimed at revising its framework to value inventory using the retail inventory accounting management structure. The new system aimed at measuring inventory at higher granular levels and the process started with the UK subsidiary, United States, Canada, and Puerto Rico.

The changes represent the core of this project’s focus allowing the system to align inventory accounting elements that aid merchants to operate their business activities (Ulrich et al. 2011). This has allowed the aggregation of specific inventory groups, even at lower levels leading to a new cost evaluation of any inventory.

Using Walmart as a case study provided an opportunity to critically analyze the various accounting information systems used by retail companies in inventory costing and accounting, as discussed in the scholarly world. The approach is essential for understanding theoretical inventory accounting concepts using a problem-solving framework.

For instance, Walmart’s inventory management system represents a key study area in this case, because of its contribution in making Walmart a leader in the retail industry (Bromiley & Rau, 2016).

It is therefore important to link the company’s departmental strategies from different business units to the overall WalMart inventory management system. This is applied in terms of the strategic approaches essential in exploiting the benefits that innovative inventory accounting systems provide.

With such an approach, it is apparent that the strategies linked to inventory management, relate to the company’s operation management, profitability, and productivity strategies.

Another element to consider in the case study is the vendor-management inventory framework. According to Ulrich et al. (2011), Walmart has adopted a successful inventory management strategy by implementing an efficient vendor-management inventorymodel that allows Walmart’s suppliers to access stock inventory data directly from the Walmart’s inventory management information system.

Examples of such data include the current inventory stocks alongside the rate products are sold. This allows suppliers to know when to add the stock, with Walmart monitoring and controlling real transit of products from warehouses to stores, thus shifting the majority of inventory management activities to suppliers.

 It is important to use this case to analyze the benefits of implementing a vendor-management inventory (Bromiley & Rau, 2016). For instance, one has to understand why the model minimizes delays in inventory movement across the supply chain.

The benefits arise as suppliers have direct access to current data on stock levels in Walmart stores. The paper needs to relate the inventory vendor-management model to the impact it has on Walmart’s Human Resource department and the direct effects on HR costs. 

Case Analysis

For the paper, the researcher analyzed the key management accounting and costing measures employed by Wal-Mart. They include the firm’s capital structure, management effectiveness, costing structure, e-business model and the management accounting techniques employed.

Management Effectiveness

The accounting and costing information system implemented by Walmart reflects the management structure it uses. The figures are a reflection of Wal-Mart’s position in the retail industry, revealing transparency in its operation with an effective management team.

Accounting Variable Company Industry Sector
ROA- (TTM) 8.91 8.6 10.66
ROA – A five-year average 8.84 6.77 9.75
ROI (TTM) 14.53 13.53 16.46
ROI – A five-year Average. 13.78 10.30 15.82
ROE (TTM) 24.39 17.44 20.08
ROE- A five-year average 21.89 13.07 18.96
(Walmart 2018, Annual Report)

Comparing Wal-Mart’s assets to those of others in the industry, it is clear that Walmart is standing above the industry average.

How Walmart’s Accounting System and Costing System Support Modern Operations

Over the years, Walmart has provided a low pricing system to maintain huge sales volume backed by the advanced spread of operations and client base. More so, the supply management system enhances efficiency and eliminates outlays.

Walmart has managed to minimize overhead and operational costs taking advantage of its bargaining power that ensures suppliers sell at low prices (Ulrich et al. 2011). The major tenets Walmart depends on include huge sales volume, wide scope of operation and client base. The company uses a large market share strategy by selling everything and opening stores everywhere.

This has ensured that Walmart meets the demand of numerous market segments, alongside huge buying opportunities compressed in one location. The multiple-store format widens the market reach selling products using four stores (De Souza et al. 2002). The stores include discount stalls, Sam’s Club warehouses that sell bulky items, neighborhood markets, and Walmart Supercenters.

Walmart has a supply chain management system that relies on electronic product information, in addition to addressing the vendor role and a warehouse layout. The supply chain system is viewed as the most advanced electronically including the barcodes, RFID, with the ability to obtain detailed product information electronically on products (Ulrich et al. 2011).

The information is available in the database, helping in making decisions regarding inventory management systems. The electronic system allows the company to master the ability to know what is needed, how much and when needed.

The decision to engage directly with manufacturers ensures that the suppliers manage their inventory in the warehouse. Walmart has shifted the role of inventory management from them to suppliers backed by a vendor-managed inventory application.

This has supported a quick flow of inventory management from Walmart to suppliers, reducing irregularities and ensure availability of products to clients on time. This has enhanced cost-effective processes and the savings allowing Walmart stores to charge low prices (Ulrich et al. 2011).

The company has enabled point-of-sales data, real-time sales and warehouse inventory, all stored in a centralized database shared to suppliers. Walmart also has a private satellite system that permits the transfer of information among all stakeholders in the supply chain supported by voice and data communication among all units and departments globally.

Walmart’s Inventory Costing Methods

“First-in, First-out” (FIFO) is a process where inventory purchased or produced first is sold first. According to Ulrich et al. (2011), the cost linked to inventory purchased first represents the cost expensed first. Walmart uses FIFO as its costing method, where inventory cost indicated on the balance sheet is the inventory cost recently purchased.

This approach has helped Walmart maneuver inflation because of the lowest cost estimates of bought goods, leading to high net income. On the other hand, Last-in, First-out (LIFO), recently produced items are the first to be recorded and sold first. Inventory evaluation happens based on the cost of materials bought earlier own during the year.

Therefore, during inflation, LIFO leads to high-cost estimates of goods sold leading to lower net incomes. For instance, in the US, when Walmart sells products, yet the item costs keep increasing, using LIFO leads to a less taxable income and reduced income tax payments compared to FIFO (Roberts & Berg, 2012).

In the long-term, a dramatic increase in costs leads to significantly low-income tax payments. LIFO applies only in the US as per the ‘Generally Accepted Accounting Principles” (GAAP), but the ‘International Financial Reporting Standards’ (IFRS) prohibits its use in other countries, forcing Walmart to use FIFO for international inventories (De Souza et al. 2002).

When necessary, Walmart records LIFO provision for estimated annual inflation, which is then adjusted to actual end-year results. When required, LIFO provision calculations at Walmart are calculated based on the available inventory levels, the markup rates, alongside internally generated retail price indices.

Walmart accounts for inventory shrinkage through its top leadership making judgments and estimates that could affect the final inventory valuation of cost and gross profit amount (De Souza et al. 2002). Some of the judgments made involve recording markdowns essential in selling inventory and accounting for shrinkage.

It is important to offer estimations on inventory losses, which represent shrinkage between physical inventory additions based on the percentage of sales. After the annual inventory counts, provision is adjusted to reflect historical results. The solution includes writing off inventory value by recording shrinkage losses.

Walmart’s Capital Structure

Walmart capital structure combines Equity and Debt that is balanced, raising equity from the public as the stock traded daily on the stock market. The shareholders own equity, where they receive dividends upon the company’s declaration, paid as retained earnings. Retained earnings are set aside after profit announcements (Ulrich et al. 2011).

Currently, the company has 40% Equity and 60% debt, representing a healthy cash flow (Bromiley & Rau, 2016). This capital structure shows that Wal-Mart has an optimized capital structure, with the ability to reduce the firm’s weighted capital average cost. Walmart has a good debt-equity ratio in comparison to other companies.

Walmart’s Cash flow Statements

The company uses cash flow statements to provide information on cash receipts and company payments when doing business during an accounting period, and the cash balance on a firm’s statement explaining the firm’s financial position. According to De Souza et al.  (2002), Walmart’s cash flow statement indicates operating, investing and financing activities.

Strengths and Weaknesses of Walmart’s Accounting System

With this system, Walmart can invest funds in other projects other than inventories, in addition to reducing additional stores for the inventory. The system also reduces time wastage, enhances customer satisfaction, and reduce on time used to serve customers faster and conveniently. 

Buying bulk products are more affordable and cheaper, thus helping to meet the unexpected surges in demand (Bromiley & Rau, 2016). Nonetheless, some of the risks include the system being capital intensive at the introduction stage. More so, it exposes the business to numerous risks such as the depreciation of items and products expiring and mixing up of stock. 

Discussion

Without a doubt, Walmart is the largest retail giant with high growth prospects in distinct divisions. The company has taken advantage of its free-trade zone opportunity to increase it’s market value and growth avenues.

Increased innovation culture has seen the firm advance technological encouraging lean strategy (Ulrich et al. 2011). Inventory costing and valuation methods used at Walmart aim at assessing the total inventory costs, with the measurement criteria showing a more elaborate accounting system than the normal accounting procedures.

According to Roberts and Berg (2012), the accounting management system at Walmart has helped the firm conduct appropriate forecast and predictions allowing for valuation of retail inventory.

Walmart has used its accounting system to review its business decisions while depending on the provided financial information. Accordingly, the costing method has helped Walmart reduce unproductive inventory by permitting stores to manage own stock, as well as timely and effective markdowns.

Walmart’s Accounting System has helped the company decrease its unproductive inventory using the M-Caps inventory and Market Basket one with the latter concentrating on report sales of products and the former essential in tracking what clients combine in their shopping list (Roberts & Berg, 2012).

The demographic profiling application caters for Walmart sales and the software has helped the company manage its inventory better by reducing distribution centers.

Walmart implements ‘just in time’ (JIT) method of inventory management by measuring the operational objective of operations by minimizing storage costs. This is done through the cross-docking method, where supplier trucks go to the company’s warehouse to reduce transportation cost.

Cross-docking has helped the company minimize on inventory size, deliver goods faster, hence able to respond to fluctuations fast depending on demand and market changes, hence ensuring operational efficiency (Roberts & Berg, 2012).

The most significant inventory performance measures include stock-out rate, inventory turnover, and size. According to Agrawal and Smith (2013), inventory turnover represents the rate Walmart’s inventory is sold out and restocked, with a high inventory turnover being less costly and desirable. The company uses inventory size to measure cost, spending less on limited inventory, revealing the firms cost minimization objectives through a cost leadership strategy.

More so, the ABC analysis is classified as category A items in the inventory, which represent finished goods sold in stores, supported by an effective information system at the SCM and inventory management (Fisherman, 2007). The company monitors and records items in this category. On the other hand, the category B items represent other supplies used to support operations, among them maintenance equipment and office furniture.

The items receive moderate monitoring, alongside moderate recording (Agrawal & Smith, 2013). Lastly, the last category of C items represents the least monitored and recorded inventory items such as toiletries and office supplies such as paper, having the least effect of daily operations by the company.

Conclusion

Walmart uses advanced accounting information systems to support its global operations including the e-business model. Walmart’s Accounting Systems cover every section of the inventory, allowing suppliers to access data on all levels to know the status of their stock levels.

Walmart’s Accounting System supports a vendor-management inventory model that is essential in the minimization of costs and capacity to sell products at low prices. With the cost minimized by transferring it to suppliers, the company implements a cost leadership strategy by minimizing costs, thus supporting the firm’s profitability and financial stability.

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System

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Walmart’s Accounting System