Isaac Hill
Advanced Accounting
BUS 433
Professor Derouin
November 26, 2013
Walt Disney Company 10-K: The Magic Kingdom Report
Walt Disney Company is a corporation, or a legal entity separate from its owners and
controllers, that was created in 1923 by Walter Elias Disney, or Walt Disney for short. This corporation
has done much in its ninety year life span; it has created characters that amuse small children and make
adults nostalgic, it has constructed resorts and amusement parks across the globe where both adults
and children can play together, and finally it has become one of the strongest corporations in American
history. But how can we better understand the depth of financial thought that goes into the structure of
a colossal organization like Walt Disney Company? The answer can be found by going through its
financial statements and corporate history. By looking for the different organizational and historical
puzzle pieces that combine to form Walt Disney Company we can better understand why Walt Disney
Company is such a strong pillar of both American culture and American Finance.
Now to fully understand the History of Walt Disney Company one has to understand how it was
created, how it has survived, and what it is doing at this current point in history. Walt Disney Company
was created in 1923 when Walt Disney signed a contract with M.J. Winkler to produce a series of “Alice
Comedies.” The company that produced these comedies would be named, “The Disney Brothers Studio”
after Walt Disney and his brother Roy Disney. The location of Disney’s original studio moved around
from Kingswell Avenue, to Hyperion Avenue, and eventually steeling in Burbank, CA where it still
resides.
Even with its strong current standing, Walt Disney Company has had some difficult times. The
original company, “The Disney Brothers Studio”, could not be properly rune as one unit and had to
break into four smaller pieces Walt Disney Productions, Ltd., Walt Disney Enterprises, Liled Realty and
Investment Company, and Disney film recording Company. Walt Disney Company also had to battle
through the years of war during WWII, because their movies were too costly to pay for themselves. Even
in the 1980s Walt Disney had had to take radical steps and even impose a poison pill policy, where the
company dissolves when it is acquired, in order to fight off a hostile takeover of the company and its
assets.
However, even during these times of trouble, Walt Disney Company has managed to
grow and develop as a corporate entity. During WWII, Walt Disney Company gave out an IPO of stock
worth 13.88 dollars. Investing in a thousand of these shares would have produced a combined value,
after stock splits, of over twenty four million dollars. Walt Disney Company made another major
corporate leap by joining the Dow Jones Industrial Average in 1991. Even today Walt Disney Company is
making great additions to its copywrited material by purchasing Lucasfilm Ltd. and the entire Star Wars
Universe. This purchase was administrated by Disney’s management team which was headed by Robert
A. Iger, and consists of both a corporate and a business focus. The corporate group manages
international business, security, corporate strategy, business development, and human resources. The
Business unit controls assets like ESPN, consumer products, the Disney studios, Walt Disney parks and
resorts, and other Disney media networks.
Now that we understand a little about how far Walt Disney Company has come, let us look at
where they stand on a financial basis. In order to understand how Disney works, financially, we must
first look at their balance sheet, which describes the financial position of Disney at one point in time.
Now as far as assets go, Disney has six major accounts for current assets; it has cash and cash
equivalents, receivables, inventories, Television costs, deferred income taxes, and other current assets.
Now cash and cash equivalents, receivables, inventories and other standard accounts are each fairly
understandable; however, how does Walt Disney Company handle accounts like Television costs, which
are not regular. Walt Disney Company understands Television costs as production costs that are either
current or long term assets depending on if the asset is going to be expensed within the current year.
Now looking at long term assets we see many of the same current assets in terms of investments and
Goodwill; however, Walt Disney Company also includes a long term asset account called Parks, resorts
and other property, at cost Attractions, buildings and equipment. This account is very specifically named
because it doubles as a property plant and equipment account; however, it gives the financial statement
reader a better understanding of how Walt Disney Company is using its assets. Current liabilities, long
term liabilities, and all of the equity accounts reflect the normal operations of a healthy corporation.
Now as far as working capital goes Disney Company had eight hundred ninety six million dollars in
current assets after they took out current liabilities. Disney’s current ratio was a respectable 1.07 at the
end of 2012, and its quick ratio was a slightly discouraging 0.77.
Moving into the income statement territory we see the revenue that Walt Disney Company
makes being reduced from EBITAD into Net income. This Revenue comes from five major business
segments of Walt Disney Company operations; these segments include media networks, parks and
resorts, studio entertainment, consumer products, and interactive products.
The Media Networks used by Walt Disney Company include Cable Networks, Domestic television
network, television productions operations, domestic and international television distribution, domestic
television stations, domestic broadcast radio networks and stations, and publishing and digital
operations. Interesting companies that Walt Disney Company operates through these operations are
ESPN and ABC Family.
The second types of operations that Walt Disney Company uses to create revenue are Parks and
Resorts. The parks and resorts included in this business segment include the Walt Disney World Resort
in Florida, the Disneyland Resort in California, a Disney Resort and Spa in Hawaii, the Disney Vacation
Club, the Disney Cruise Line and Adventures by Disney.
The third business segment that generates revenue is the Studio Entertainment segment. This
segment produces and acquires live-action and animated motion pictures, direct-to-video content,
musical recordings and live stage plays. The Studio Entertainment segment produces and distributes
films under the banners of Walt Disney Pictures, Pixar, Marvel, and UTV.
The fourth business segment managed by Walt Disney Company is their sale of Consumer
Products. These markets in consumer products include the merchandise licensing market, the publishing
market, and the retail market. The Merchandise Licensing market includes the sale of toys, apparel,
home décor and furnishings, stationery, health and beauty, accessories, food, footwear, and consumer
electronics. The Publishing market includes the publishing of children’s books, magazines, and digital
products. Finally all of these products are distributed and sold in the Retail stores segment of the Walt
Disney Company. Disney Retail stores are located in countries and continents like North America,
Europe, and Japan.
The final business segment that generates income for Disney Company is the Interactive
segment. The two different sections of this segment are interactive games and interactive media.
Interactive games created by Walt Disney Company Include on line games such as Disney Universe and
Club Penguin. Interactive media includes branded online services intended for kids and family
entertainment.
The third financial statement we will look at is the statement of cash flows. The main point that
can be taken away from Walt Disney Company’s Statement of Cash Flows is that their yearly increase in
revenue over the past three years has more than sustained the combined cost of their Operating,
Investing, and Financing activities. Over the past three years, from 2010 to 2012, Walt Disney Company
has increased its yearly net income from 4.3 billion dollars to 6.1 billion, an increase of 1.8 billion dollars.
This increase in net income was very necessary for Disney in 2012, because of its purchase of Lucasfilm
Ltd.; however, the overall negative cash flows of 2.025 billion dollars is not fully seen until the most
recent 10-K given in 2013.
The last financial statement that we will look at in this paper is the Statement of
Shareholder’s Equity. Over the last three years, from 2010 to 2012, the Walt Disney Company has
maintained a very systematic Statement of Shareholders Equity. The only major change they made
recently is their purchases of Marvel and Lucasfilm, both major content creators in Disney’s industry. For
Marvel, Disney issued 54 million shares of stock at a price of 26.84, totaling about 1.44 billion dollars.
The purchase of Lucasfilm totaled about 4.05 billion dollars with half of that being given in the form of
37 million shares of Disney stock, as shown on their 2013 statement. Apart from these acquisitions, the
Walt Disney Company normally only makes adjustment to their Statement of Shareholders’ Equity for
comprehensive income, equity compensation activity, common stock repurchases, dividends, stock
distributions, and other changes.
The include statement has several promising turn over ratios to examine. Accounts receivable
turns over about 6.46 times a year, meaning that they usually receive cash within fifty six days of their
credit sales. Their inventory turns over 27.51 times during the year, showing that they need to restock
inventory about every thirteen days. Both of these turnover rates show a healthy collection of credit,
and a healthy use of inventory.
Now because Disney has maintained so many different vacation destinations with less than a
fifty percent ownership, Disney has to consolidate their different financial statements to make sure they
include their different Variable interest entities within their organization. The 10-K form defines VIEs as,
“…a company that is consolidated into the parent company if the parent company has the
power to direct activities that most significantly impact the economic performance of the VIE
and has the obligation to absorb losses or the right to receive benefits from the VIE that could
potentially be significant to the VIE.(Walt Disney Company)”
Because of this definition, even though the Walt Disney Company owns less than half of the voting stock
in each of their foreign resorts, the Company must include their foreign resorts in their financial
statements.
Walt Disney Company not only consolidates the financial statements it gets from its foreign
operations, it also translates their different denominations of currency into U.S. Dollars. Even though the
U.S. Dollar is the functional currency for most of its international operations, Disney still has to translate
some of its consolidated financial statements for locations where the local currency is the functional
currency. Disney’s policy, with U.S. dollar functional currency locations, is to translate foreign currency
assets and liabilities at the end of period exchange rates, except for non-monetary balance sheet
accounts, which are measured at historical rates. Income statement accounts are measured at the
average exchange rate. All gains and losses are from these adjustments are included in income. For
times where the Local currency is the functional currency assets, liabilities, revenues, and expenses are
all translated in the same way; however, this translation also included an adjustment for equity which is
translated at historical rates. Finally, the cumulative translation adjustment is included in other
comprehensive income or (loss).
In conclusion, the Walt Disney Company is a strong corporation. It has developed its cultural and
fiscal standing in the United States and in the world by providing family friendly entertainment in the
form of its merchandise, its use of intellectual property, and its development of its vacation
destinations. Walt Disney Company has proven its strength over the course of its ninety year life span
and will continue to live on, given the strength of its assets and business segments.