Task 1 – balance sheet

The Nestle’s assets and liabilities are divided into current and non-current. Hence, the firm has a
classified balance sheet.
Assets
1. Asset “Inventories” that amounts to CHF 9 125 mln. is part of the operating cycle according to
IAS 1,68. IAS 1 states that assets from the operating cycle are classified as current. Hence, asset
“Inventory” is a current asset.
2. Asset “Trade and other receivables” that amounts to CHF 11 167 mln. is part of the operating
cycle according to IAS 1,68. IAS 1 states that assets from the operating cycle are classified as
current. Hence, asset “Trade and other receivables” is a current asset.
 3. Asset “Property, plant and equipment” that amounts to CHF 29 956 mln. is not classified as held-
for-sale and doesn’t t meet any of criteria of IAS 1, 66 for current assets. Hence, asset “Property,
plant and equipment” is a non-current asset.

Liabilities
1. Liability “Provisions” has a current part and a non-current part. CHF 780 mln. of liability
“Provisions” is classified as current. CHF 1 033 mln. of liability “Provisions” is classified as non-
current. Liability “Provisions” is separated as current and non-current because CHF 780 mln. of
this liability will be settled within 12 months of the date of the financial statements, whereas
CHF 1 033 mln. will not be settled within 12 months of the date of the financial statements.

2. In its annual report from 2018, in note 12.2d, Nestle discloses that CHF 7 mln. of its derivative
liabilities are classified under trading derivatives (“Undesignated derivatives” item). On Nestle’s
balance sheet from 2018, these trading derivative liabilities are classified as a current liability – in
“Derivative liabilities.”
 3. Liability Trade and other payables” amounts to CHF 17 800 mln.. IAS 1, 70, states that trade
payables are connected with the operating cycle. As a result, on Nestle’s 2018 balance sheet,
trade payables are classified as a current liability – under “Trade and other payables.”

Task 2 – Income statement

a)c) The Consolidated Income Statement of Nestle shows expenses for different activities (e.g. COGS,
Distribution expenses, R&D cost etc.). Hence, expenses are classified by function. COGS relates
expenses from providing goods, Research and development (R&D) costs related to research and
development, Distribution costs relate to expenses associated with selling and distribution etc.

d) In its annual report from 2018, in note 17.8, Nestle discloses that the item “Currency retranslations, net
of taxes” was reclassified to the Income Statement in the amount of CHF 108 mln.. The journal entry for
this event would have been:
Loss (P&L) CHF 108 mln.

Gain (OCI) CHF 108 mln.

e) This recycling implies that in a prior period, Nestle recognized in OCI a loss of CHF 108 mln. on
“Currency retranslations, net of taxes”. In the 2018 period, this loss of CHF 108 mln. was recycled to net
income. Hence, the firm recognizes in OCI a gain of CHF 108 mln. to offset, or reverse, this prior loss
and recognizes this loss in net income.

Task 3 – statement of equity

 Accounts values as of January 1, 2018 60943

 Share Capital: 311
 Treasury Shares: (4537)
 Translation reserve: (19436)
 Other Reserves 989
 RE: 83629
 Total equity attributable to shareholders of the parent : 60956
 Non-controlling interests: 1273
 Total equity: 62229

1. Net income attributable to the parent company is shown on the statement of equity in retained
earnings (RE) – the equity account net income attributable to the parent company is included in:
RE = beginning RE + net income − dividends ± other.
Net income=84620-84962+7124-723+49+3-181+4108+97= CHF 10 135 mln.
On the line “Profit for the year” in the consolidated statement of changes in equity of “Nestle” (2018)
we can see that Retained earnings increased by 10 135. That is connected with increase of net income
attributable to the parent company.
2. Other Comprehensive income (OCI)
Other comprehensive income is those revenues, expenses, gains, and losses under both Generally
Accepted Accounting Principles and International Financial Reporting Standards that are excluded
from net income on the income statement. This means that they are instead listed after net income on
the income statement.
Basically, other comprehensive income (OCI) not transferred to another equity account is shown on
the statement of equity in accumulated OCI (AOCI) – the equity account OCI is included in.
However, in the case of “Nestle” revenue and expenses related to OCI are transferred to another
equity accounts – in translation reserve, other reserves and retained earnings. Hence, there is a decline
in Translation reserve on 893, decline in other reserves on 12, bur increase in retained earnings in
723. Totally, for the year 2018 there is a decrease in OCI on 182 (not taking into account non-
controlling interest).
3. Events involving shareholders.
There are different types of events with shareholders. In the case of the Financial Statement of
“Nestle” in 2018 there are events connected with dividends, movement of treasury shares, equity
compensation plans, changing in non-controlling interests and reduction of share capital.

 Dividends.
First of all, I’d like to write a journal entry for the following event connected with dividends:
The dividend related to 2017 was paid on April, 18 2018. As the shareholders approved the
proposed dividends of CHF 2,35 per share, the result was CHF 7124 million.
This situation is about accrued expenses when firm recognized an expense but hasn’t paid yet.
In 2017 it was:
Retained earnings 7124
Dividends payable 7124
In 2018 it was
Dividends payable 7124
 Cash 7124
As a result, retained earnings decreased by 7124

 Movement of treasury shares.

Treasury stock is a contra-equity account. It represents the amount of common stock that the
company has purchased back from investors. This is reflected in the books as a deduction from
total equity.
Here is a journal entry:
Cash 6726
Retained Earnings 49
Treasury shares 6677
This event is connected with reselling treasury shares after repurchasing. As a result. “Nestle” got
the cash, but treasury shared declined in 6677.
As the debited cash was greater than credited Treasury shares, Retained earnings has a value of
6726-49=49
As a result, there was a decline in retained earnings and in treasury shares. But cash was increased
because of this event.

 Reduction in share capital.

Reduction in share capital in 2018 was a result of buy-back program launched in 2017. As a
result, there was a retirement of a significant number of shares.
As a result of buy-back program there was a following journal entry:
Treasury Shares 4113
Cash 4108
Share Capital 5
Treasury shares were bought back and share capital and retained earnings reduced on 4113.

Task 4 – statement of cash flows

1. CFO – net cash flows during the accounting year from operating activities.
Operating activities – activities that relate to the firm’s primary activity; are not investing or financing
activities.
IAS 17, B states that with the indirect method, CFO are
CFO (indirect method) = net income ± adjustments.
The first item in CFO is a measure of profit – e.g., net income, or profit & loss (P&L).
One type of adjustment to CFO is for non-cash items included in net income.
• Non-cash revenue – subtracted from CFO
• Non-cash expenses – added to CFO
Non-cash revenue increases net income but involves no cash inflows. Non-cash expenses reduce net
income but involve no cash outflows.
Note 16.2 implies that
The following non-cash items were included in non-cash items of income and expense:
Depreciation of PPE (3604)
We are adding to CFO depreciation of PP&E as depreciation is an expense. Hence, the journal looks
like this:
Depreciation of PP&E 3604
ADIL 3604
Impairment of PPE (500)
We are adding to CFO impairment of PP&E because it is an expense. Hence, journal entry is the
following:
Impairment of PP&E 500
ADIL 500
Impairment of goodwill (592)
Similarly, we’re adding Impairment of goodwill because it’s an expense.
Impairment of goodwill 592
ADIL 592
Amortization of intangible assets (320)
Amortization of intangible assets 320
ADIL 320

2.

Adjustments to CFO for changes in three operating assets and operating liabilities
CFO has to be adjusted for changes in operating assets and liabilities.

 One adjustment to CFO is to subtract 450 from the increase in the value of account
“Inventory”. An increase in account “Inventory” implies the firm payed for an item that is not
included in expenses. Hence, this increase of 450 in account “Inventory” implies that the firm
payed 450 in cash for inventories that were not included in expenses. As a result, CFO is
lower by 450 relative to net income. Consequently, 450 is subtracted from CFO. The journal
entry for this change in account “Inventory” is:
Inventories 450
Cash 450

 Another adjustment to CFO is to subtract 547 from the increase in the value of account
“Trade and other receivables”. An increase in account “Trade and other receivables” implies
Nestle provided a good or a service that it has not yet received cash for. Hence, this increase
of 547 in account “Trade and other receivables” implies that Nestle supplied the goods but
didn’t receive cash for that. As a result, CFO is lower by 547 relative to net income.
 Consequently, 547 is subtracted from CFO. The journal entry for this change in account
“Trade and other receivables” is:

Trade and other receivables 547

Sales revenue 547

 Final adjustment to CFO is to add 1 043 from the increase in the value of account “Trade and
other payables”. An increase in account “Trade and other payables” implies Nestle used an
item it has not paid cash for yet. Hence, this increase of 1 043 in account “Trade and other
payables” implies that Nestle used an item it has not paid cash for yet. As a result, CFO is
higher by 1 043 relative to net income. Consequently, 1 043 is added to CFO. The journal
entry for this change in account “Trade and other payables” is:
Expense 1 043
Accounts payable 1 043

Task 5 – Inventory
1. Nestle approaches a bit differently to valuation and write-down of various types of inventory.
Thus, Nestle values and writes down raw materials and purchased finished goods at the lower of
purchase cost calculated using the FIFO method and net realizable value. At the same time, work
in progress, sundry supplies and manufactured finished goods are valued and written down at the
lower of weighted-average cost and net realizable value. It is worth noting that cost of inventories
includes the gain/losses on cash flow hedges for the purchase of raw materials and finished
goods.
2. One item on the income statement of Nestle related to inventory is COGS. COGS is related to
expenses of Nestle for purchased goods, raw materials etc. that the company has written-down
along with the recognition of corresponding sales revenue . The journal entry for this expense is
(we assume, that COGS is generated only by the write-down of the Inventories, since there is no
numerical information available on write-downs of Inventories):
COGS 46 070
 Inventory 46 070
It is worth noting that inventory includes costs for purchases of inventory, conversion costs,
and costs for bringing inventory to its present location and condition.

Also, inventory is related to the item “Decrease/Increase in working capital” in the CFS, and is
represented as change in inventories in 16.3. of Nestle annual report. “Change in inventories” is
related to cash paid for the inventories the firm hasn’t recognized yet. Thus, the journal entry for
this change in account “Inventory” is:
Inventories 450
Cash 450

Task 6 - Property, plant and equipment (PP&E)

1. Nestle approaches the review of the carrying amount of the Group’s PP&E when there is the
indication of the impairment. The list of indicators could be: 1) unfavourable development of
business under competitive pressures; 2) severe economic slowdown in a given market; 3)
reorganization of operations to leverage their scale. Impairment of PP&E mainly arises drom the
plans to optimize industrial manufacturing capacities by closing or selling inefficient production
facilities. To asses (or reassess) the value of PP&E in use, the DCF approach is implemented.
 2. One item on the CFS of Nestle related to PP&E is Depreciation of PP&E. Depreciation of PP&E
is related to expenses of Nestle for acqusition of PP&E that is recognized for the current period.
The journal entry for this expense is:
Depreciation of PP&E 3 604
ADIL 3 604

Another item on the CFS of Nestle related to PP&E is Impairment. Impairment is related to
expenses from a decline in PP&E’s value for a reason other than depreciation – e.g., because the
present value of the net cash flows a firm expects PP&E to generate have declined. The journal
entry for this expense is:
Impairment loss 500
ADIL 500

Task 7 – Financial assets

1. Nestle classifies the fair value of its financial assets in the following hierarchy:
 Level 1. The fair value of financial assets quoted in active markets is based on their quoted
closing price at the balance sheet date. Examples include exhange-traded commodity
derivatives and financial instruments such as investments in debt and equity securities.
 Level 2. The fair value of financial instruments that are not traded in active market is
determined by using valuation techniques using observable market data (e.g., DCF models,
standard valuation models using markets parameters for interest rates, yield curve, dealer
quotes etc.).
 Level 3. The fair value of financial instruments that are measured on the basis of the entity
specific valuations using inputs that are not based on observable market data (unobservable
inputs). When the fair value of unquoted instruments cannot be measured with sufficient
reliability, Nestle carries such assets at cost less impairment, if applicable.
2. One item on the CFS of Nestle related to Financial Assets is “Interest and dividends received”.
Interest and dividends received income is related to revenue recognized from having interest in
definite financial assets (or other companies) for the current period. The journal entry for this
income is:
Cash 192

Interest and dividends received 192

Another item on the Income statement of Nestle related to Financial Assets is “Financial
income”. Financial income is related to revenue recognized from having interest in definite
financial assets (or other companies) for the current period as well as the assessment of the
premium (discount) Nestle had from holding those assets for the current period. The journal entry
for this income is (we assume that all financial income is transferred into real cash and is not just
accrued within the current period):

Cash 247

Financial income 247