Decision case

1-1

1. Investors: statement of income, balance sheet, cash flow statement and statement of
equity. (Basic EPS = $ 3.32, Diluted EPS = $ 3.30)
Yes, dividends were paid, with dividend per share being $ 1.560.
$ 1,052 mil. was reinvested in the company.

2. Potential investors: statement of income and balance sheet.

With basic and diluted EPS having an average growth rate of 5.025% and 5.06% respectively,
future earnings can be estimated at a basic EPS of $ 3.49 and a diluted EPS of $ 3.47.

3. Suppliers: Consolidated balance sheet.

No, the suppliers should not extend further credit to Kellogg’s. It doesn’t have sufficient cash
or cash like assets to repay accounts payable.

4. IRS: Income statement & Balance sheet.

Kellogg owes $ 697 million. as tax liability.

5. Bankers: Assets & Liabilities.

Kellogg’s long-term debt is $ 4,908 million. Moreover, the company has a low liquidity ratio.
The company’s low liquidity and with the long-term debt, I would probably not sanction the
new loan.

1-2

1.Net income: 1,240 million.

2. Assets = Liabilities - Stockholder's Equity

11,847 = 9,693 - 2,154

The company’s financial position is poor. Since liability is almost 80% of the total assets
value.

3. Purchase of additional property. The same can be inferred from the consolidated cash
flow. (From $377 million to $474 million).
2-1.

Computation of working capital of Kellogg & General Mills (in $ million)

Working Capital = Current Assets – Current Liabilities

Current Ratio = Current Assets / Current Liabilities

2010 2009
General Mills
Total current assets 3480.0 3534.9
Total current liabilities 3769.1 3606.0
Working capital (289.1) (71.1)
Current Ratio 0.92 0.98

Kellogg
Total current assets 2915 2558
Total current liabilities 3184 2288
Working capital (269) 270
Current Ratio 0.92 1.12

Change in Working Capital = Year 2010 Working Capital – Year 2009 Working Capital

Change in net working capital of General Mills = (218)

Change in net working capital of Kellogg mills = (539)

Percentage change in current ratio

General Mills = -5.8%

Kellogg = -18.1%

3. Both the companies have almost similar items in their current assets expect deferred income
tax which has been paid in advance by General Mills
i) The largest item that computes the current assets of Kellogg is accounts receivables
which stands at 1,190 million dollars
ii) The largest item that computes the current assets of General Mills is inventories
which stands at 1,344 million dollars
4. Both the companies have a low liquidity in terms of current ratio, but both are in same
industry and thus ratios should be compared with that of the industry standard.
Kellogg: A fall of 18.1% in the current ratio from the previous year is very steep and could
prove risky in the long run.
General Mills: A fall of 5.8% in the ratio from the previous year, even though is not very
steep, it is quite significant. Finances need to be raised to ensure adequate cash flow.
2-2.

1. The largest item that computes the current assets of General Mills is inventories which stands
at 1,344 million dollars. Inventories is almost 39% of the total current asset. This asset
represents the raw materials and goods that are at various stages of productions and are
called inventories. These assets play a pivotal role in current assets since these goods would
be sold in the coming year and would in turn bring up the cash (Most liquid of all assets) to
the company.
2. The second largest item that computes the current assets of General Mills is account
receivables which stands at 1,041.6 million dollars. Receivables account to 30% of the total
current asset. This asset represents the amount that must be collected from the customers to
whom the goods were sold on credit. This asset is mostly favourable as the amount should be
collected in the next 30 days, but during unforeseen events the customers would default the
payment and hence the amount would not be realised and would eventually settle as bad
debts, which is unfavourable to the business.
3. Inventories: Inventories would increase as an when the company would purchase raw
materials and goods required to make the finished product required for the business. And the
same would decrease when the inventories have been used to convert into finished products
and has been sold to the customers in which case cash or accounts receivables would
increase.
Accounts Receivables: These assets increase when the business makes a sale in credit to its
customers. And the same would decrease as and when the customers in future would pay for
the purchases made, in which case cash would increase.