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Individual Learning Project Questions Name_______________________________ General Information: 1. What is the name of your corporation? 2. Where are the corporate headquarters? 3. What is the corporation’s fiscal year end? 4. What are the primary products or services of the corporation? 5. Graph the high and low price of the company’s stock for each quarter of the last two years. What was the high and what was the low? 6. Who is the company’s transfer agent and where are they located? 7. Who are your company’s competitors? Market Information: 8. On which stock exchange is your corporation’s stock traded? 9. What is the current market price of their stock? 10. What is the ticker symbol used to identify your corporation on the stock exchange? Internet Information: 11. What is the Internet address of your corporation? Be sure it appears as a hyperlink. 12. Is the corporation’s Annual Report online? 13. Are its financial statements on-line? 14. Is your company listed on Annualreports.com? 15. How long is your company’s 10-K report at the Securities and Exchange Commission website (Edgar Database)?  Cash Flow and Retained Earnings: 16. List the amount of cash flows from each of the 3 activities: Operating, Investing, and Financing for the 2 most recent years. What was the increase or decrease in cash for each of these years? 17. Were there any Non-Cash Investing/Financing Transactions? Describe the type and amount. 18. What is the dollar difference between accrual net income and Cash provided by Operations? 19. What investing activity provided the largest inflow of cash in the current year? 20. What investing activity used the largest amount of cash in the current year? 21. What financing activity provided the largest inflow of cash in the current year? 22. What financing activity used the largest amount of cash in the current year? 23. Does the company have sufficient cash inflows from the appropriate category? Describe any problems the company many experience with cash flow from your analysis of the cash flow statement. 24. Show the change in Retained Earnings for the 2 most recent years. What was net income for each year? How much was paid out in dividends each year? 25. Were the dividends on common stock and/or preferred stock? What was the amount of each? 26. Did Retained Earnings change for any reasons other than net income or dividends? Explain. 27. What classes of stock does your company have? 28. How many shares of each class of stock are authorized, how many are issued, and how many are outstanding? 29. Does your company have any treasury stock? How many shares and what dollar amount? 30. What is the par or stated value of each of your company’s stocks? Footnote Disclosures: 31. How many footnote disclosures does your company have? 32. How many significant accounting policies are listed under its Summary of Significant Accounting Policies? 33. What does it include as Cash and Cash Equivalents? 34. What method does it use to value Inventory? 35. What method(s) does it use to depreciate its assets? 36. Does it have any leased assets? If yes, describe them. 37. What policies does it have in regard to Foreign Currency Translations? 38. Describe any pending lawsuits in which it is involved. 39. Provide its Earnings per Share for the 2 most recent years? Report of the Independent Auditor(s): 40. Who is/are your company’s auditor(s)? 41. Where are they located? 42. Does the auditor(s) give a qualified opinion, an unqualified opinion, a disclaimer of opinion, or an adverse opinion? What does that opinion mean? Is it good? 43. What is the auditor’s responsibility in regard to the financial statements? 44. What is management’s responsibility in regard to the financial statements? 45. What financial statements were included in the auditor’s opinion? 46. Did the auditor believe that the statements were presented fairly? Management’s Report: 47. Who bears the responsibility for the integrity and the objectivity of the financial statements? 48. What does management say they are doing to assure the public that the financial information is reliable? 49. What is the responsibility of the Audit Committee of the Board of Directors?    Analysis: (use Excel to complete this section) 50. Provide common-size analysis of your company’s income statement and balance sheet for the 2 most recent years (must be done using Excel with formulas). 51. Provide horizontal analysis of your company’s income statement and balance sheet, showing the dollar amount and percent of change using the 2 most recent years (you must use an Excel spreadsheet with formulas). 52. Perform ratio analysis on your company using the ratios listed in Exhibit 13.16 on page 505 of your text (these must be in an Excel spreadsheet, using formulas to calculate the ratios). You should present them in a similar format as the text: group by category, list name of ratio, formula in words, and the ratio calculation. Give a short explanation of your conclusions about your company after each category of ratios (i.e. How liquid is your company? How efficiently is it using its assets? etc.). Conclusions: 53. Are you optimistic or pessimistic regarding the future of your chosen corporation? Explain. 54. Would you invest in the stock of the company? Explain. 55. Would you invest in the bonds of the company? Explain. Bal Sht Kraft Foods Group, Inc. Consolidated Balance Sheets (in millions of U.S. dollars) Common Size Analysis Horizontal Analysis December 27, 2014 December 28, 2013 2014 2013 $ Change \% Change ASSETS Cash and cash equivalents $ 1,293 $ 1,686 5.63\% 7.28\% $ (393) -23.31\% Receivables (net of allowances of $21 in 2014 and $26 in 2013) 1,080 1,048 4.71\% 4.53\% 32 3.05\% Inventories 1,775 1,616 7.74\% 6.98\% 159 9.84\% Deferred income taxes 384 360 1.67\% 1.56\% 24 6.67\% Other current assets 259 198 1.13\% 0.86\% 61 30.81\% Total current assets 4,791 4,908 20.88\% 21.20\% (117) -2.38\% Property, plant and equipment, net 4,192 4,115 18.27\% 17.78\% 77 1.87\% Goodwill 11,404 11,505 49.70\% 49.70\% (101) -0.88\% Intangible assets, net 2,234 2,229 9.74\% 9.63\% 5 0.22\% Other assets 326 391 1.42\% 1.69\% (65) -16.62\% TOTAL ASSETS $ 22,947 $ 23,148 100.00\% 100.00\% $ (201) -0.87\% LIABILITIES Current portion of long-term debt $ 1,405 $ 4 6.12\% 0.02\% $ 1,401 35025.00\% Accounts payable 1,537 1,548 6.70\% 6.69\% (11) -0.71\% Accrued marketing 511 685 2.23\% 2.96\% (174) -25.40\% Accrued employment costs 163 184 0.71\% 0.79\% (21) -11.41\% Dividends payable 324 313 1.41\% 1.35\% 11 3.51\% Accrued postretirement health care costs 192 197 0.84\% 0.85\% (5) -2.54\% Other current liabilities 641 479 2.79\% 2.07\% 162 33.82\% Total current liabilities 4,773 3,410 20.80\% 14.73\% 1,363 39.97\% Long-term debt 8,627 9,976 37.60\% 43.10\% (1,349) -13.52\% Deferred income taxes 340 662 1.48\% 2.86\% (322) -48.64\% Accrued pension costs 1,105 405 4.82\% 1.75\% 700 172.84\% Accrued postretirement health care costs 3,399 3,080 14.81\% 13.31\% 319 10.36\% Other liabilities 338 428 1.47\% 1.85\% (90) -21.03\% TOTAL LIABILITIES 18,582 17,961 80.98\% 77.59\% 621 3.46\% Commitments and Contingencies (Note 11) EQUITY Common stock, no par value (5,000,000 shares authorized; 601,402,816 shares issued at December 27, 2014 and 596,843,449 at December 28, 2013) - 0 - 0 0.00\% 0.00\% - 0 Additional paid-in capital 4,678 4,434 20.39\% 19.16\% 244 5.50\% Retained earnings 1,045 1,281 4.55\% 5.53\% (236) -18.42\% Accumulated other comprehensive losses (562) (499) -2.45\% -2.16\% (63) 12.63\% Treasury stock, at cost (796) (29) -3.47\% -0.13\% (767) 2644.83\% TOTAL EQUITY 4,365 5,187 19.02\% 22.41\% (822) -15.85\% TOTAL LIABILITIES AND EQUITY 22,947 23,148 100.00\% 100.00\% (201) -0.87\% [Source: 10-K, page 36] Inc Stmt Kraft Foods Group, Inc. Consolidated Statements of Earnings (in millions of U.S. dollars) For the Years Ended Common Size Analysis Horizontal Analysis December 27, 2014 December 28, 2013 2014 2013 $ Change \% Change Net revenues $ 18,205 $ 18,218 100.00\% 100.00\% $ (13) -0.07\% Cost of sales 13,360 11,395 73.39\% 62.55\% 1,965 17.24\% Gross profit 4,845 6,823 26.61\% 37.45\% (1,978) -28.99\% Selling, general and administrative expenses 2,956 2,124 16.24\% 11.66\% 832 39.17\% Asset impairment and exit costs (1) 108 -0.01\% 0.59\% (109) -100.93\% Operating income 1,890 4,591 10.38\% 25.20\% (2,701) -58.83\% Interest and other expense, net (484) (501) -2.66\% -2.75\% 17 -3.39\% Royalty income from Mondelez International - 0 - 0 0.00\% 0.00\% - 0 Earnings before income taxes 1,406 4,090 7.72\% 22.45\% (2,684) -65.62\% Provision for income taxes 363 1,375 1.99\% 7.55\% (1,012) -73.60\% Net earnings $ 1,043 $ 2,715 5.73\% 14.90\% $ (1,672) -61.58\% [Source: 10-K, page 34] Ratio Ratio Formula Calculation Liquidity and Efficiency Current Ratio = Current assets / Current liabilities 1.00 Acid-test ratio = Cash + Short-term investments + Current receivables / Current liabilities 0.50 Accounts receivable turnover = Net sales / Average accounts receivable, net 17.11 times Inventory turnover = Cost of goods sold / Average inventory 7.88 times Days sales uncollected = Accounts receivable, net / Net sales * 365 21.65 days Days sales in inventory = Ending inventory / Cost of goods sold *365 48.49 days Total asset turnover = Net sales / Average total assets 0.79 times Kraft Foods has low liquidity, with a current ratio of 1 and an acid-test ratio of 0.5, although this is in line with industry standards. Kraft Foods is also not very efficient, with inventory turnover of 7.88 times, which is well below the industry average of 11.15 times, and total asset turnover of .79 times compared to an industry average of 1.76 times. Solvency Debt ratio = Total liabilities / Total assets 0.81 Equity ratio = Total equity / Total assets 0.19 Debt-to-equity ratio = Total liabilities / Total equity 4.26 Times interest earned = Income before interest expense and income taxes / Interest expense 3.90 times Kraft Foods has very high debt and debt-to-equity ratios. Times interest earned of almost four times means that there is not an immediate risk of default, but the company is very highly leveraged, which is risky for investors. Profitability Profit margin ratio = Net income / Net sales 6\% Gross margin ratio = Net sales - Cost of goods sold / Net sales 27\% Return on total assets = Net income / Average total assets 5\% Return on common stockholders equity = Net income - Preferred dividends / Average common stockholders equity 22\% Book value per common share = Shareholders equity applicable to common shares / Number of common shares outstanding $ 7.43 Basic earnings per share = Net income - Preferred dividends / Weighted-average common shares outstanding $ 1.76 [Weighted Average shares outstanding found in 10-K, Note 14] Kraft Foods has strong profitability. Profit margin of 6\% and return on total assets of 5\% are both more than double the industry averages of 3.5\% and 2\%. Return on equity of 22\% is significantly stronger than the industry average of 7.9\%. Market Prospects Price-earnings ratio = Market price per common share / Earnings per share 50.14 times Dividend yield = Annual cash dividends per share / Market price per share 2.4\% [Dividends per share found on Income Statement] Kraft Foods has a high P/E ratio at 50 times earnings, indicating that high growth is expected [this is likely because of the merger with Heinz that had been announced by the time Kraft Foods shares stopped trading]. A dividend yield of 2.4\% is a strong return for investors interested in income. Graph Quarter High Low Q3 2013 $ 58.76 $ 51.20 Q4 2013 $ 55.93 $ 51.72 Q1 2014 $ 56.56 $ 50.54 Q2 2014 $ 60.24 $ 55.47 Q3 2014 $ 61.10 $ 53.33 Q4 2014 $ 64.47 $ 53.63 Q1 2015 $ 90.61 $ 60.28 Q1 2015 $ 91.32 $ 82.94 KRFT Stock Price by Quarter High Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 58.76 55.93 56.56 60.24 61.1 64.47 90.61 91.32 Low Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 51.2 51.72 50.54 55.47 53.33 53.63 60.28 82.94 KRFT Stock Price by Quarter High Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 58.76 55.93 56.56 60.24 61.1 64.47 90.61 91.32 Low Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 51.2 51.72 50.54 55.47 53.33 53.63 60.28 82.94 ACCT 212 Individual Learning Project Questions Name____ Example ____________ General Information: 1. What is the name of your corporation? Kraft Foods Group 2. Where are the corporate headquarters? Northfield, IL 3. What is the corporation’s fiscal year end? 12/27/2014 4. What are the primary products or services of the corporation? “We manufacture and market food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products.” [10-K, page 1] 5. Graph the high and low price of the company’s stock for each quarter of the last two years. What was the high and what was the low? The high was $91.32; the low was $55.93 [https://finance.google.com/finance/historical?cid=667819950492168&startdate=Jul\%201\%2C\%202013&enddate=Jun\%2030\%2C\%202015&ei=LFsPWuCyONPEmAGh2YDgDw&start=0&num=30. For existing companies, Yahoo Finance is a better option though, because you can group the historical prices by month rather than by day, meaning you only have to look at 3 lines to determine the overall high/low instead of 65 lines] 6. Who is the company’s transfer agent and where are they located? Wells Fargo Bank, N.A. [Definitive Proxy Statement, page 70; some companies will include this in the 10-K, or there are websites where you can look it up as well – www.stai.org is a good one] 7. Who are your company’s competitors? Large national and international companies and numerous local and regional companies, generic products and retailer brands, wholesalers, and cooperatives [10-K, page 4] Market Information: 8. On which stock exchange is your corporation’s stock traded? NASDAQ [10-K, page 1] 9. What is the current market price of their stock? $88.19 [This is the final stock price before the merger with Heinz – found on Kraft’s website, although for current companies, it will be available on almost any financial website] 10. What is the ticker symbol used to identify your corporation on the stock exchange? KRFT Internet Information: 11. What is the Internet address of your corporation? Be sure it appears as a hyperlink. www.kraftheinzcompany.com [This is the current web address, it would have been different before the merger] 12. Is the corporation’s Annual Report online? Yes [It is available in many places – the company’s website, www.morningstar.com, www.businessweek.com, etc.] 13. Are its financial statements on-line? Yes 14. Is your company listed on Annualreports.com? No [Not anymore, at least – it probably was before the merger] 15. How long is your company’s 10-K report at the Securities and Exchange Commission website (Edgar Database)? 171 pages Cash Flow and Retained Earnings: 16. List the amount of cash flows from each of the 3 activities: Operating, Investing, and Financing for the 2 most recent years. What was the increase or decrease in cash for each of these years? Category 2014 2013 Operating 2,020 million 2,043 million Investing (535 million) (426 million) Financing (1,866 million) (1,171 million) Total Increase/(Decrease) (393 million) 431 million [10-K, page 38] 17. Were there any Non-Cash Investing/Financing Transactions? Describe the type and amount. No [If your company does, it will say so either at the bottom of the cash flow statement, or in a footnote] 18. What is the dollar difference between accrual net income and Cash provided by Operations? $977 million [10-K, page 38; 2,020 million operating cash flow minus 1,043 million net income] 19. What investing activity provided the largest inflow of cash in the current year? Proceeds from sale of property, plant and equipment [10-K, page 38] 20. What investing activity used the largest amount of cash in the current year? Capital Expenditures [10-K, page 38] 21. What financing activity provided the largest inflow of cash in the current year? Proceeds from stock option exercises [10-K, page 38] 22. What financing activity used the largest amount of cash in the current year? Dividends paid [10-K, page 38] 23. Does the company have sufficient cash inflows from the appropriate category? Describe any problems the company many experience with cash flow from your analysis of the cash flow statement. Yes, the company has sufficient cash flows from operating activities. Although operating cash flows have declined over the past three years, at this time, the company is still able to fund its investing and financing activities with its operating cash flows. 24. Show the change in Retained Earnings for the 2 most recent years. What was net income for each year? How much was paid out in dividends each year? Category 2014 2013 Retained Earnings 1,045 million 1,281 million Net Income 1,043 million 2,715 million Dividends 1,279 million 1,228 million [10-K, page 37] 25. Were the dividends on common stock and/or preferred stock? What was the amount of each? Common stock, $1,279 million [This is based on the fact that the company has only common stock outstanding; if there were preferred dividends, they would be on a separate line on the statement of equity] 26. Did Retained Earnings change for any reasons other than net income or dividends? Explain. No [10-K, page 37] 27. What classes of stock does your company have? Common [10-K, page 37] 28. How many shares of each class of stock are authorized, how many are issued, and how many are outstanding? 5 billion shares authorized, 601,402,816 shares issued, 587,331,944 shares outstanding [10-K, page 47; some companies may provide all of these numbers on the balance sheet as well] 29. Does your company have any treasury stock? How many shares and what dollar amount? Yes, 14,070,872 shares at $796 million [10-K, page 47 and 36] 30. What is the par or stated value of each of your company’s stocks? No par value [10-K, page 36] Footnote Disclosures: 31. How many footnote disclosures does your company have? 16 [10-K, page 69] 32. How many significant accounting policies are listed under its Summary of Significant Accounting Policies? 18 [10-K, pages 39-42] 33. What does it include as Cash and Cash Equivalents? Demand deposits with banks and all highly liquid investments with original maturities of three months or less [10-K, page 39] 34. What method does it use to value Inventory? Average cost [10-K, page 39] 35. What method(s) does it use to depreciate its assets? Straight line [10-K, page 39] 36. Does it have any leased assets? If yes, describe them. Yes, some property is leased [10-K, page 61-62; Kraft does not describe the leased property in detail, but provides a schedule of minimum rental commitments] 37. What policies does it have in regard to Foreign Currency Translations? “We use various financial instruments to mitigate our exposure to changes in exchange rates from thire-party and intercompany actual and forecasted transactions. These instruments may include forward foreign exchange contracts and foreign currency options. We primarily use these instruments to hedge our exposure to the Canadian dollar. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.” [10-K, page 42] 38. Describe any pending lawsuits in which it is involved. An investigation by the CFTC related to the trading of December 2011 wheat futures contracts [10-K, page 61] 39. Provide its Earnings per Share for the 2 most recent years? 2014 - $1.75, 2013 - $4.55 [10-K, page 34] Report of the Independent Auditor(s): 40. Who is/are your company’s auditor(s)? Pricewaterhouse Coopers [10-K, page 33] 41. Where are they located? Chicago, IL [10-K, page 33] 42. Does the auditor(s) give a qualified opinion, an unqualified opinion, a disclaimer of opinion, or an adverse opinion? What does that opinion mean? Is it good? The auditor gave an unqualified opinion. This means that the auditor believes that the financial statements are presented fairly in accordance with GAAP. It is a good opinion. [10-K, page 33] 43. What is the auditor’s responsibility in regard to the financial statements? To express an opinion on the financial statements based on the audit [10-K, page 33] 44. What is management’s responsibility in regard to the financial statements? To prepare the financial statements and to maintain effective internal control over the financial reporting process [10-K, page 33] 45. What financial statements were included in the auditor’s opinion? Statement of Earnings, Statement of Comprehensive Earnings, Balance Sheet, Statement of Equity, Statement of Cash Flows, Notes to Consolidated Financial Statements [10-K, page 73; many auditors will list these in the report (p.33), but in this case, the report references Item 15, which is where this list is located] 46. Did the auditor believe that the statements were presented fairly? Yes [10-K, page 33] Management’s Report: 47. Who bears the responsibility for the integrity and the objectivity of the financial statements? Management [10-K, page 70] 48. What does management say they are doing to assure the public that the financial information is reliable? Establish and maintain effective internal control over the financial reporting process [10-K, page 70-71] 49. What is the responsibility of the Audit Committee of the Board of Directors? Overseeing the accounting and financial reporting processes and audits of the financial statements [Definitive Proxy Statement, page 17; some companies will include this information in the 10-K, while others, like Kraft, will reference another document] Analysis: (use Excel to complete this section) 50. Provide common-size analysis of your company’s income statement and balance sheet for the 2 most recent years (must be done using Excel with formulas). See Excel document 51. Provide horizontal analysis of your company’s income statement and balance sheet, showing the dollar amount and percent of change using the 2 most recent years (you must use an Excel spreadsheet with formulas). See Excel document 52. Perform ratio analysis on your company using the ratios listed in Exhibit 13.16 on page 529 of your text (these must be in an Excel spreadsheet, using formulas to calculate the ratios). You should present them in a similar format as the text: group by category, list name of ratio, formula in words, and the ratio calculation. Give a short explanation of your conclusions about your company after each category of ratios (i.e. How liquid is your company? How efficiently is it using its assets? etc.). See Excel document Conclusions: 53. Are you optimistic or pessimistic regarding the future of your chosen corporation? Explain. I am optimistic about the future of Kraft Foods. While the company is very highly leveraged, they are well-established and generating strong profits and cash flows. 54. Would you invest in the stock of the company? Explain. Yes, I would invest in Kraft Foods stock. Although profits did decline from 2013 to 2014, the company remains very profitable, with a return on equity of 22\% and profit margin and return on assets that exceed industry averages. The company also provides a high dividend yield of 2.4\%. While the efficiency and solvency ratios would be a concern as a stock investor, making the stock more risky, the high returns make the investment worthwhile. 55. Would you invest in the bonds of the company? Explain. No, I would not invest in Kraft Foods bonds. While they do have sufficient returns to cover interest payments, with times interest earned of 3.9 times, the low liquidity and high debt-to-equity ratios make the company a high risk for bondholders. I would want a higher return than bonds offer in order to accept that level of risk. [Note that these conclusions are not “right” or “wrong” – you might conclude that you would do just the opposite and invest in bonds, but not stocks. The conclusions should be yours, but they must be supported by your analysis, including relevant items from the Excel analysis.] KRFT Stock Price by Quarter High Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 58.76 55.93 56.56 60.24 61.1 64.47 90.61 91.32 Low Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q1 2015 51.2 51.72 50.54 55.47 53.33 53.63 60.28 82.94 Page 4 of 5