The following operating data (in thousands) were adapted from the 2001 SEC 10-K filings of Walgreen and CVS:
Accrued expenses payable
1. Using the preceding data, adjust the operating income for CVS and Walgreen shown in Case 3–1 to an adjusted cash basis. Hint: To convert to a cash basis, you need to compute the change in each accrual accounting item shown above and then either add or subtract the change to the operating income.
2. Compute the net difference between the operating income under the accrual and cash bases.
3. Express the net difference in (2) as a percent of operating income under the accrual basis.
4. Which company’s operating income, CVS’s or Walgreen’s, is closer to the cash basis? 5. Do you think most analysts focus on operating income or net income in assessing the long-term profitability of a company? Explain.