Financial Accounting Case Study Module 1: A. General Mills Consolidated Statements of Earnings: 1. The recorded sale amount of almost $8 billion is not the actual amount of cash collected. The amount of $8 billion includes cash and credit sales.
2. Sales increased each year from 2000 to 2002. The difference between the year 2000 and 2001 was a 5.35% increase (5,450-5,173/5,173 = .0535). The difference between the year 2001 and 2002 was a 45.85% increase (7,949-5,450/5,450 = .4585).
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3. The largest expense for General Mills for the years 2000, 2001, and 2002 was the same; over 50% of the revenue each year went towards the cost of sales. Sales in 2002 were the largest, about 7% more than the two previous years.
2000: (2,698/5,173) = .522 = 52.2% 2001: (2,841/5,450 = .521 = 52.1% 2002: (4,767/7,949) = .599 = 59.9% 4. Net Income: 2000: $614 million 2001: $665 million 2002: $458 million When comparing the net income figures for the past three years, it is seen that between 2000 and 2001, the net income increased by $51 million, but between 2001 and 2002, the net income decreased by $207 million.
5. A company’s stock price is usually influenced by the amount of net income because when finding the price of the stock, you must divide the number of stocks by the net income. So, the higher the net income, the lower the price of stocks, which is what buyers look for (means better profit).
6. Even though General Mills paid dividends in 2000, 2001 and 2002, the corresponding total dividend payments did not appear as an expense on the income statement because dividends are not an expense; they are a financing activity that is reported on the statement of stockholder’s equity. They are payments that are made to only the owners of the company.
B. General Mills Consolidated Balance Sheets: 7. A company has assets so that they have a location and equipment to operate/create a business. Assets are resources that are controlled by a business. Without assets, one cannot produce and/or run a company. The purpose of assets are to keep track of expenses, what a company owns, like equipment, inventory, cash etc., and creates value for the company.
8. The total amount of assets at the end of 2002 was $16,540 million.
9. When comparing the assets from the beginning of 2002 to the end, we found that the percentage increase in assets was 224.89% ( 16,540-5,091/5,091 = 2.2489 = 224.89%). Goodwill is the type of asset that is responsible for the increase.
10. The two groups that have contributed assets to General Mills and claim on their assets are shareholders and lenders. Shareholders have about $5,733 million in claims and the lenders have a claim of $5,591 million.
C. General Mills Consolidated Statement of Stockholder’s Equity: 11. The General Mill’s total stockholders increased significantly from May 27, 2001, to May 26, 2002, because they sold more stock.
12. Comprehensive income is the change in a company’s owner’s equity during a period that is the result of all transactions and activities that are not by the owner. These can include profits from operating activities, foreign currency, net income, events that change owner’s equity except those from the company’s own stockholders and selling stock or paying dividends.
D. General Mills Consolidated Statement of Cash Flows 13. There are three categories of cash flows shown on the company’s cash flow statement. They are the following: 1. Operating activities 2. Investing activities 3. Financial activities 14. When comparing the net income figure to the amount of net cash provided by operating activities for each of the three years, one observes that the net income went up in the first two years and then decreased between the second and the third year. The net cash from operating activities increased each year, but its greatest growth was between the second and the third year. So, when the net income was the lowest, the net cash from operating activities was the greatest.
15. Net cash provided by Net cash used by operating activities investment activities 2000: $722 million (564 million) 2001: $737 million (460 million) 2002: $913 million(3,271 million) It is clear to see that in the year 2000 and 2001, operating activities was large enough to cover the investing cash outflow, but in 2002, the investing cash outflow exceeded far past the amount of net cash provided by operating activities. Loans were used to make up the difference.
16. When comparing the dividend payments to the income amounts for the current year, we found that the dividend payout ratio for 2002 was 78.2% (358/458 = .7816 = 78.2) E. General Mills Report of Management Responsibilities and Reports of Independent Public Accountants: 17. The management of General Mills, Inc. is responsible for the accounting numbers in the annual report.
18. For safeguards, General Mills used internal controls to ensure the accuracy of the reported numbers, including an audit program, a separation of duties and responsibilities and instated policies that demand ethical behaviour from employees.
19. The independent accountant does not say that the reported amounts are correct but does state that they are reported fairly. “We believe these consolidated financial statements do not misstate or omit any material facts… In our opinion, the consolidated financial statements referred to above present fairly, in all material respects…” The CPA assures that the statements are in accordance with the GAAP.
20. General Mills hired a CPA (Certified Public Accountant) to audit the financial statements to ensure accuracy and to verify that the numbers on the statements (disclosures made by the management in its reports) are consistent with the company’s actual financial position, cash flow, and results from its operating activities.
21. General Mills hired KPMG LLP as their accountant to audit their financial statements. The report of the independent accountants that performed this was signed on June 24, 2002.
F. General Mills Financial Statements: 22. General Mills’ major operating activities during 2002 were net sales, selling, general, and administrative, and cost of goods. The major difference between accrual and the cash flow of these activities is that accrual includes cash and credit, where these major operating activities only include cash. Accrual accounts for all, while the cash flow doesn’t account for credit sales until the money is collected.
23. General Mills return on total assets for 2001 was 13.1% (665/5,091= .1306) and in 2002, the return on total assets was 2.8% (458/16,540 = .0276). The return on total assets deteriorated from 2001 by 10.3% (.1306-.0276 = .103) 24. If you owned 10,000 of the company’s common stock in 2002, your claim on the company’s earnings would be $13,800 (10,000 x 1.38 ( EPS-basic) = 13,800). If you were to own 10,000 of the company’s common stock in 2001, your claim would be greater than your claim if you would to purchase them in 2002 by $9,600, making your claim in 2001 $23,400. (10,000 x 2.34 (EPS-basic) = 23,400).
25. The major source of cash for General Mills in 2002 was the issuance of long-term debt. With the cash they received, they were able to purchase Pillsbury (acquired in a stock and cash transaction).
26. Major financing activities performed in 2002 was the change in long-term debt. They increased their amount of debt while paying off some of their notes payable. They also purchased some treasury stocks. In the year 2002, their net cash increased incredibly, by about $3,500 million, which was one of the biggest increases recorded over the previous years for net cash.
27. A major investing activity that occurred in 2002 was when General Mills purchased Pillsbury.
28. At the end of 2002, the company’s most important assets were: inventories, goodwill, receivables, and land, buildings, and equipment. Other resources that might be important that aren’t reported on the balance sheet are the skills and level of intelligence of the management and the employees, as well as the value of the brand name 29.
If asked to assess the company’s financial performance of General Mills in 2002, I would have to say that they were very successful. Their financial activities show that they are a growing and prosperous company; their operating and financing activities are increasing and the investing cash flows decreasing, keeping the inflow larger than the outflow. Their successfulness opens many new opportunities for them in the future.
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