Assignmnent: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Case: General Mills Inc. Understanding Financial Statements.
General Mills, Inc., incorporated in Delaware in 1928, is a leading producer of packaged consumer foods. The company has three segments U.S. Retail, International, and Bakeries and Foodservice. U.S. Retail sells ready-to-eat cereals, meals, frozen dough products, baking products, snacks, yogurt and organic foods. The International segment includes retail business in Canada, Europe, Latin America and the Asia/Pacific region. Bakeries and Foodservice sells to retail and wholesale bakeries, and convenience stores. (Source: Company 2006 Form 10-K)
Learning Objectives
• Become familiar with a set of financial statements including auditor opinions and significant accounting policy footnotes.
• Perform a basic analysis and interpretation of the financial statements, including common-size income statements and balance sheets.
• Recognize the role of estimation in the preparation of financial statements.
Refer to the General Mills financial statements for fiscal year 2006 (that is, the year ended May 28, 2006).
Concepts
a. What is the nature of General Mills' business? That is, based on what you know about the company and on the accompanying financial statements, how does General Mills make money?
b. What financial statements are commonly prepared for external reporting purposes? What titles does General Mills give these statements? What does "consolidated" mean?
c. How often do publicly traded corporations typically prepare financial statements for external reporting purposes?
d. Who is responsible for the financial statements? Discuss the potential users of the General Mills financial statements and the type of information they are likely interested in.
e. Who are General Mills external auditors? Describe the two "opinion" letters that General Mills received in 2006. In your own words, what do these opinions mean? Why are both opinions dated several months after General Mills' year end?
Analysis
f. Use a spreadsheet to construct common-size income statements (which General Mills calls Statements of Earnings) and balance sheets for 2006 and 2005. Common-size income statements scale each income statement line item by net sales. Common-size balance sheets are created by dividing each figure on a given year's balance sheet by that year's total assets, thereby creating a balance sheet on a "percent of assets" basis. You will use these common-size statements in answering several of the questions below.
g. Refer to General Mills' balance sheet for fiscal 2006 (the year ended May 28, 2006).
i. Show that the accounting equation holds for General Mills. Recall that the accounting equation is: Assets = Liabilities + Equity.
ii. What are General Mills' major assets? Calculate the proportion of short-term and long-term assets for 2006. Does this seem appropriate for a company such as General Mills?
iii. In general, what are intangible assets? What is goodwill? What specific intangible assets might General Mills have?
iv. How is General Mills financed? What proportion of total financing comes from non-owners?
h. Refer to General Mills' Statement of Earnings for fiscal 2006 (the year ended May 28, 2006) and to the common-size income statement you developed in part f, above.
i. Review the revenue recognition policies of General Mills discussed in Note 1 (Summary of Significant Accounting Policies). Discuss how the recognition policies for recording net sales and the treatment of returns and promotions are consistent with the revenue recognition criteria under Generally Accepted Accounting Principles (GAAP).
ii. What are General Mills' major expenses?
iii. Were there any significant changes in the cost structure during the most recent year?
iv. In fiscal 2005, General Mills separately reports the following three items: Restructuring and other exit costs, Divestitures, and Debt repurchase costs. Why didn't the company just include all of these amounts within the line item for Selling, general and administrative expenses?
v. Was the company profitable during 2006? During 2005? Explain your definition of "profitable."
vi. Compute the percentage change in net earnings from fiscal 2005 to 2006 and from fiscal 2004 to 2005. How would your answers change if the special items for Divestitures and Debt repurchase costs were excluded from fiscal 2005 net earnings? Caution: Divestitures and Debt repurchase costs are reported on the income statement before tax implications while net earnings is an after-tax number. Assume a marginal tax rate of 38.3% when considering the tax effects of the special items.
i. Refer to General Mills' fiscal 2006 Statement of Cash Flows.
i. Compare General Mills' net earnings to net cash provided by operating activities and explain the difference.
ii. How much cash did General Mills use for expenditures for land, building and equipment during fiscal 2006?
iii. What amount of dividends did General Mills pay during the year?
Several notes to the financial statements refer to the use of "estimates." "Which accounts on General Mills' balance sheet require estimates? List as many accounts as you can. Are any accounts estimate-free?
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.