DECISION CASES

DC – 1
SAMRAT KANITKAR
ROLL NUMBER: FT222092
 Decision Case 1-1
1. Investors: How much did the company earn for each share of stock that I own? Were any
dividends paid, and how much was reinvested in the company?

Answer:
The investor can resort to the accounts stated under Per share Amounts in the Consolidated
Statement of Income. These are as follows:
a. Basic: $3.32 per share
b. Diluted: $3.30 per share

Dividends paid can be noted from Consolidated Statement of Shareholder Equity.

The Reinvested amount can be seen under Common stock Repurchases in the Consolidated
Statement of Shareholder Equity and the value of the account under consideration is
$1,560.

2. Potential investors: What amount of earnings can I expect to see from Kellogg’s in the near
future?

Answer:
Potential investors can get to know about the earnings they expect to see from the
Consolidated Income Statement. The statement provides information for three fiscal years
– 2008, 2009, 2010. Trends and comparisons can thus be looked at before making the final
decision.

3. Suppliers: Should I extend credit to Kellogg’s? Does it have sufficient cash or cash-like
assets to repay accounts payable?

Answer:
The Consolidated Balance Sheet provides information regarding Cash and Cash Equivalents
and other Current Assets as well as Current Liabilities such as Accounts Payable. This data
can be utilised to calculate ratios such as the Current Ratio, Quick Ratio or Cash Ratio in
order to assess the liquidity of the Kellogg’s, which is in turn, its ability to repay its liabilities.

4. IRS: How much does Kellogg’s owe for taxes?

Answer:
It can be inferred from the Consolidated Statement of Income that Kellogg’s owes $502
million as Taxes to IRS for the fiscal year ended 2010.

5. Bankers: What is Kellogg’s long-term debt? Should I make a new loan to the company?

Answer:
From the Consolidated Balance Sheet, we find that Kellogg’s long-term debt is $4908. Also,
the Consolidated Statement of Income states that the company’s net income is $1240.
Hence, it is not advisable to grant a new loan to the company.
 Decision Case 1-2
Refer to the financial statements for Kellogg’s reproduced in the chapter and answer the
following questions.

1. What was the company’s net income for 2010?

Answer:
From the Consolidated Statement of Income, the Net Income for Kellogg’s for the year
2010 is $1240 million.

2. State Kellogg’s financial position on December 30, 2010, in terms of the accounting
equation.

Answer:
According to the Accounting Equation,
Assets = Liabilities + Stockholder Equity
The Financial Position of Kellogg’s as on December 30, 2010 is as follows:
Assets = $11847
Liabilities = $9693
SE= $2154
Clearly, Assets = Liabilities + SE. The Balance Sheet Balances.

3. By what amount did Property, net, increase during 2010? Explain what would cause an
increase in this item.
Answer:
The Property, net increased by $118 million in 2010.
This could be due to two reasons:
a. Appreciation of the owned Property
b. Acquisition of new Property.
 Decision Case 2-1

Refer to the financial information for General Mills and Kellogg’s reproduced at the back of the
book for the information needed to answer the following questions.

1. Compute each company’s working capital at the end of the two most recent years. Also, for
each company, compute the change in working capital during the most recent year.

Answer:

2. Compute each company’s current ratio at the end of the two most recent years. Compute the
percentage change in the ratio during the most recent year.

Answer:
3.How do the two companies differ in terms of the accounts that made up their current assets at the
end of the most recent year? What is the largest current asset each company reports on the balance
sheet at the end of the most recent year?

Answer:
The difference between the composition of the accounts of the two companies is that – The accounts
that make up the current assets in the balance sheet of General Mills contains Deferred Income Taxes
of value $42.7 million, whereas that of the Kellogg’s does not contain any such account entry.

For Kellogg’s – the Largest Current Asset is Accounts Receivable.

For General Mills – the Largest Current Asset the company holds is Inventories.

4.On the basis of your answers to (2) and (3), comment on each company’s liquidity.

Answer:
The Current Ratios for both the companies, when compared with their previous years, show a
declining trend. Moreover, they are less than 1 for the Fiscal year 2010.This indicates that the liquidity
is not great for both the companies and they are in possession of lesser cash as compared to Fiscal
year 2009. As a result, liquidating assets to pay off liabilities could be difficult and time-taking.

Decision Case 2-2

Refer to General Mills balance sheet reproduced at the back of the book to answer the following
questions.

1. Which is the largest of General Mills current assets on May 30, 2010? What percentage of
total current assets do it represent? Is it favourable or unfavourable that this is the company’s
largest current asset? Explain your answer.

Answer:
Largest Current Asset of General Mills as on May 30, 2010 is Inventories which is about $1344 million.
It represents about 38.62 % of the total Current Assets.

For a company Cash is almost always considered as the most important asset in terms of liquidity.
But General Mills is a Sporting Goods Company. Inventory is an important asset to the company since
in case of Demand Surges, it acts as a buffer and keeps the supply chain resilient. However, in case of
Demand Plunges, the very same inventory turns out to be a liability which needs maintenance until it
gets out of the warehouse. Today’s trends are to minimize Inventory but not eliminate it completely.
Thus, Inventory can be considered as one of the important assets if not the most important asset.
 2.Which is the second largest of General Mills’s current assets on May 28, 2006? What percentage
of total current assets does it represent? Explain what this asset represents and why it is such a
significant asset for a company such as General Mills.

Answer:
The Second Largest Current Asset of General Mills as on May 30, 2010 is Receivables which is about
$1041.6 million.
It represents about 29.93 % of the Total Current Assets.

It is favourable that the company has 30% of Current Assets as Receivables as they can get cash against
it in the near future. However, Accounts Receivables mean that the company has provided service on
credit and needs to keep a track and a limit on it in order to ensure that it gets the cash that is due
and does not get cheated in this regard.

3. Explain what events would cause each of those accounts to both increase and decrease during
the year.

Answer:
Inventories: A decrease in demand may lead to piling up of inventory in the warehouse until it gets sold.
Inventory costs would thus rise. In case of demand surges, Inventory acts as a buffer. However, if the
supply is not able to meet the demand, then a velar decline in Inventory can be seen.

Receivables: An increase in Receivables can be seen when the company provides service or products to
the customers on credit. A decrease in Accounts receivables can be seen when customers fulfil their
obligations of repaying their dues. A decrease may also be noticed when companies keep on providing
goods and services on credit without getting any actual cash in return.