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Use Johnson & Johnson’s 10-K (CIK identifier 0000200406, accessible on the SEC’s website:https://www.sec.gov/edgar/searchedgar/companysearch.html) to answer the questions below.
**FY2016 = the fiscal year ending 1/1/2017 **
1, Perform a DuPont analysis of Johnson & Johnson (JNJ) for 2016 and 2015. Use average assets and average stockholder’s equity in your calculations. You will need to refer to the 10-K for 2016 and 2015 to get 2014 assets and stockholder’s equity for your calculations:
2, Cash Flow
a, Does JNJ use the direct or indirect method to prepare the operating section of the cash flow statement? Explain.
b, Explain why JNJ includes a positive adjustment of 3,754 for depreciation and amortization.
c, Explain why JNJ includes a negative adjustment of 563 in the operating section.
d, Estimate the amount of cash collected from customers using the information on the cash flow statement and the income statement.
e, Estimate the amount of cash paid for inventories using the information on the cash flow statement and the income statement. Assume that all accounts payable and accrued liabilities relate to inventory purchases.
f, Does JNJ use the direct or indirect method to prepare the investing section of the cash flow statement?
Expert Answer
| Details | 2016 | 2015 | 2014 |
| Net sales (A) | 71,890 | 70,074 | 74,331 |
| Net income (B) | 16,540 | 15,409 | 16,323 |
| Shareholders’ equity | 70,418 | 71,150 | 69,752 |
| Total assets | 141,208 | 133,411 | 130,358 |
| Average shareholders’ equity (C) | 70,784 | 70,451 | |
| Average total assets (D) | 137,310 | 131,885 | |
| Profit margin (D) (B/A) | 23.00% | 21.99% | |
| Assets Turnover (E) (A/D) | 0.52 | 0.53 | |
| Equity multiplier (F) (D/C) | 1.94 | 1.87 | |
| Du Pont analysis (D*E*F) | 23.20 | 21.79 |
2.(a) Johnson & Johnson use the indirect method to prepare the operating section of the cash flow. this can be said as cash flow from operations is arrived at starting with net income and making adjustments for depreciation expense and changes in current assets and current liabilities.
(b) The net income is arrived after deducting the depreciation and amortization expense which does not involve any cash trasaction. Therefore we must add the deprecation and amortization expense to arrive at the actual cash generated by the business.
This explains the positive adjustment of 3,754 for depreciation and amotization.
(c) Similarly , net income is arrived at after adjustments for gain / loss on sale of assets/businesses. This amount is only the gain/loss and not the actual cash received by the company. Hence this amount is to be adjusted to the net income and the actual cash received should be shown under invssting activities as the cash receipt is relating to the investments made by the company.
This explains the negative adjustment of 563 in the operating section.
(d)
Net sales (from the income statement) 71,890m
Less: Increase in accounts receivable 1,065m
Estimated collections from customers 70,825m
The equation is Sales + opening customer balance – closing customer balance = collection from customers.
Since there is an increase in the balance of customers, the collection from customers will be less than the amount of sales. Therefore the deduction.
Another way of looking at it is , since there is an increase in customer balances , which means the company has not collected all the cash for current sales . Therefore we shall deduct the amount of increase to the sales amount to arrive at the cash collected from customers.
(e)
Cost of products sold =21,685
Less:Increase in accounts payable and accrued lliabilities = 656
Estimated amount paid for inventories =21,029
We take the cost of goods sold as relating to the invontory .
There is an increase in accounts payable and accrued liabilities. This shows that the company has not paid for all the purchases it has made.Therefore the amount of increase in these liabilities accounts has to be reduced from the cost of goods sold to arrive at the figure of payments for inventories.
(f) The company uses the direct method to prepare the investing section of the cash flow . this can be said , since there is adjustment shown and the amounts are directly shown.
