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Chapter 15: Q1FSAC (page 825)

Financial Statement Analysis Cases

Case 1: Kellogg Company

Kellogg Company is the world鈥檚 leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.

(in millions)

2014

2013

Net sales

\(14,580

\)14,792

Net income

632

1,807

Total assets

15,153

15,474

Total liabilities

12,302

11,867

Common stock, $0.25 par value

105

105

Capital in excess of par value

678

626

Retained earnings

6,689

6,749

Treasury stock, at cost

3,470

2,999

Number of shares outstanding (in millions)

358

363

Instructions

  1. What are some of the reasons that management purchases its own stock?
  2. Explain how earnings per share might be affected by treasury stock transactions.
  3. Calculate the debt to assets ratio for 2013 and 2014, and discuss the implications of the change.

Short Answer

Expert verified

The solvency ratio of Kellogg Company of 2013 and 2014 is 0.82%and0.85%.

Step by step solution

01

Meaning of Financial Statement

Financial accounting can be a sub-category of the general scope of bookkeeping that deals with collecting and organizing monetary informationby reason of showing it to external users in a proper format.

02

Discussing case 1 of Kellog Company

a. Management might buy treasury offers to provide to share-holders a tax-efficient strategy for getting cash from the corporation.In addition,it might have to be repurchase offers to have them available to issue to individuals working outalternatives to buying offers, or management might buy treasury offers since it feels that its share price is as well low

Its share price accepts that by acquiring offers, it is signaling to the market that the cost is as well low. Management mightalso utilize overabundance cashto buy offers to ward off a threatening takeover.

Finally, the administration might buy offers in an exertion to alter its capital structure. If it buys offers and issues obligation (or at least does not resign obligation), it'll increment the rate of obligation in its capital structure.

b. Earnings per share are calculated by dividing net pay by the weighted-average number of shares outstanding during the year.

In the event that a Treasury share purchase reduces shares, the denominator (the weighted-average number of exceptional offers) is reduced. As a result,profit per share regularly expands. In any case, since the purchase of Treasury offers depletes corporate resources, the potential for profit may be slim. In this case, the effect on profit per share can be reduced.

c. One measure of solvency is the ratio of liabilities to individual assets combined. This ratio appears to measure how many dollars of resources are supporting each dollar of liability, should the company be financially troubled. For 2013 and 2014, it can be calculated as:

Working notes:

solvencyratio2014=DebtTotalAsset=$10,139$11,01=0.85

Solvencyratio2013=DebtTotalAsset=$9,693$11,847=0.82

This represents a slight reduction in the ratio of debt to add to resources. It can be judged that BHP Billiton's solvency is progressing, but this should be seen as undisputed and compared to the industry average.

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Most popular questions from this chapter

(Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of \(100 par, 6% preferred stock and 15,000 shares of \)10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.

Instructions

Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below

Assumptions

(a)

Preferred, noncumulative

And nonparticipating

(b)

Preferred, cumulative, and fully participating

Year

Paid-out

Preferred

Common

Preferred

Common

2012

\(13,000

2013

\)26,000

2014

\(57,000

2015

\)76,000

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation鈥檚 securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Evans鈥� transaction, under the following conditions.
  2. Employing the incremental method.
  3. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
  4. Briefly explain which method is, in your opinion, the better method.

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?

(Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of \(100 par value, 8% preferred, and 5,000 shares of \)50 par value common.

Instructions

Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.

  1. The preferred stock is noncumulative and nonparticipating.
  2. The preferred stock is cumulative and nonparticipating.
  3. The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.)

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders鈥� equity.

  1. Recorded accrued interest earned on a note receivable.
  2. Declared a cash dividend.
  3. Declared and distributed a stock split.
  4. Approved a retained earnings restriction.
  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
  6. Paid the cash dividend declared in item 2 above.
  7. Recorded accrued interest expense on a note payable.
  8. Declared a stock dividend.
  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item

Asset

Liabilities

Stockholders鈥� Equity

Paid-in Capital

Retained

Earnings

Net Income
See all solutions

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