Question

M5-29, Pro Forma Numbers Kellogg's included the following note in its fiscal 2015 10-K report. The Company's fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. The Company's 2014 fiscal year ended on January 3, 2015, and included a 53rd week. While quarters normally consist of 13-week periods, the fourth quarter of fiscal 2014 included a 14th week. a. Why does Kellogg's disclose this issue? b. How are year-over-year growth rates affected by the 53rd week? c. What pro forma adjustment could Kellogg (or we) make to facilitate the analysis of revenue trendk

Answer 1

SOLUTION:

a. The reason that Kellogg discloses the issue because the income statement reflects operating results for three fiscal years. If one of the years reported has a 53rd week, then the number for that year on the income statement will be much higher compared to other comparative years; and thus could impair any time-series analysis.

b. With the 53rd week in the year, the year-over-year growth rates of Kellogg will be artificially higher. Then will be artificially lower in the year-over-year growth rates because they will be computed off the higher prior year’s numbers.

c. The main purpose of pro forma financial statements is facilitating comparisons of historic data and future performance projections. Kellogg could approximate the sales for the 53rd week by dividing total sales for the year by 53. It could reduce the estimated amount from reported sales to eliminate the effect of the extra week. Although it may not be exact however better than an approximation of $0 sales in the 53rd week for analysis about the trends in revenue.