Home Depot Case Analysis Paper

The first half of 2007 has not looked to well for Home Depot. The company has seen a 3% decline in revenues and that resulted in a 21% decrease in earning as compared to the last half of 2006. The prudence concept is the accounting concept that best describes the situation that Home Depot is currently facing. The prudence concept is an approach that does not report revenues until they have been realized or very certain to be realized (Edmonds, Tsay, & Olds, 2011).

Home depot 3% decline in revenues in the first half of 2007 in comparison to the previous half in the year 2006 and the resultant decrease in in earnings by 21% can be attributed to the cost incurred by the company. The accounting concept that is applicable to this situation is the prudence concept. The prudence concept is a conservationist approach where revenue and profits are only included in the financial statements when they have been realized or there is reasonable certainty of realizing them (Edmonds, Tsay, Olds, 2011).

A decrease in sales impacts variable costs that have been incurred by the company. Consequently, this is will impact the contribution margin to cover fixed overhead costs for the sales attained. Home Depots profits decreased at a great rate than the sales decline
The decrease in total earnings over the beginning portion of 2007 shows the company is in a risky position to fail to break-even if sales over the second half of the year should sales continue to falls. Management teams of Home Depot should put plans in place to keep operating leverage at a minimum. A reduction in fixed costs would apply downward pressure on the break-even point and put the company in a better position on its margin of safety. Rapidly declining sales in the home improvement and property market means the company needs to adapt a sales approach and a cost structure to stabilize Home Depots earnings (Edmonds, Tsay, Olds,