Home Depot's Decrease In Sales

Home Depot's results of a 3% decline in revenues and a decrease in earning by 21% for the first of 2007, compared to the last half of 2006, can be attributed to the costs that the company incurred. The accounting concept that is applicable to this situation is the prudence concept. This concept is a conservative approach. The prudence concept adopts the idea that revenue and profits are only reported when they have been realized or when they have a high probability of being realized (Edwards, Tsay, & Olds, 2011).

The explanation for the profits of Home depot to decrease more in percentage than sales attained was due to the impacts to costs of the decreased sales. The decrease in sales caused the fixed cost per unit to increase. Because of the tighter margins it strained the fixed overhead costs causing the profits to decrease sharper than the sales. To ensure stability, a company must decrease variable cost by a proportionate decrease in fixed overhead cost (Edwards, Tsay, & Olds, 2011).

Home Depot incurs a great deal of costs in property development. These cost include the purchase land, costs associated with the building, and interest costs. The decline in sales will affect these costs negatively. Labor and overhead costs will …show more content…
A decrease of 21% in earning suggests the company is in a position to fail to break should sales not improve over the remaining half of the year. Consequently, managers of Home Depot should put a cost structure into place to counter the reduction of sales and improve the companies operating leverage. Management will also need to reduce fixed cost as much as possible to push the break-even point down. In conclusion, the rapid decline in sales in property market implies that Home Depot must put plans in place to be able to reduce cost to counteract the reduction in sales to be able to retain earnings stability (Edmonds, Tsay, & Olds,