Question

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The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix (thats below). The company’s complete annual report, including the notes to the financial statements, is available online. Instructions Refer to P&G’s financial statements and the related information in the annual report to answer the following questions.

(a)   What alternative formats could P&G have adopted for its balance sheet? Which format did it adopt?

(b)   Identify the various techniques of disclosure P&G might have used to disclose additional pertinent financial information. Which technique does it use in its financials?

(c)   In what classifications are P&G’s investments reported? What valuation basis does P&G use to report its investments? How much working capital did P&G have on June 30, 2014? On June 30, 2013?

(d)   What were P&G’s cash flows from its operating, investing, and financing activities for 2014? What were its trends in net cash provided by operating activities over the period 2012–2014? Explain why the change in accounts payable and in accrued and other liabilities is added to net income to arrive at net cash provided by operating activities.

(e)   Compute P&G’s (1) current cash debt coverage, (2) cash debt coverage, and (3) free cash flow for 2014. What do these ratios indicate about P&G’s financial condition?

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Appendix B Specimen Financial Statements: The Procter & Gamble Company

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Shareholders' Equity

Answer 1

(a) What alternative formats could P&G have adopted for its balance sheet? Which format did it adopt?

According to the description I believe this is an classified Vertical Balance sheet, as Classified balance sheets are normally the balance sheet in which assets are shown classifying them into current and fixed-and liabilities as short term and long term and owner’s equity separately is called a classified balance sheet.

They could have alternatively opted to use an unclassified Vertical balance sheet or could have prepared a balance sheet in the "T" format.

(b) Identify the various techniques of disclosure P&G might have used to disclose additional pertinent financial information. Which technique does it use in its financials?

Full disclosure principle requires a company to provide the necessary information so that people can make informed decisions. Disclosures can be found in:

the company's financial statements including any supplementary schedules and notes (or footnotes).
Management's Discussion and Analysis
Quarterly earnings reports, press releases and other communications.
(c) In what classifications are P&G’s investments reported? What valuation basis does P&G use to report its investments? How much working capital did P&G have on June 30, 2014? On June 30, 2013?

Investments are classified according to the nature of investments, i.e Fixed and current.

P&G probably uses FIFO (First In First Out) as the net income is showing an increasing trend. It could be due to the fact that the raw material might be several years old is used to value the cost of goods sold.

Working capital = Current assets - Current liabilities

Working capital in 2014 = (31617 - 33716) =(2099)

Working capital in 2013 =( 23990-30037) = (6047)

(d) What were P&G’s cash flows from its operating, investing, and financing activities for 2014? What were its trends in net cash provided by operating activities over the period 2012–2014? Explain why the change in accounts payable and in accrued and other liabilities is added to net income to arrive at net cash provided by operating activities.

I world require addition information regarding the accounting principle i.e IFRS or GAAP to prepare the cash flows.

(e) Compute P&G’s (1) current cash debt coverage, (2) cash debt coverage, and (3) free cash flow for 2014. What do these ratios indicate about P&G’s financial condition?

1. Current cash debt coverage ratio is calculated by dividing net cash from operating activities by average liabilities. This is a liquidity ratio. A higher current cash debt coverage ratio indicates a better liquidity position. Generally a ratio of 1 : 1 is considered very comfortable because having a ratio of 1 : 1 means the business is able to pay all of its current liabilities from the cash flow of its own operations.

2. Once you have the cash flow from operating activities, divide by total debt. This will permit you to understand how long it would take a company to repay its debt, considering it uses all its call for repayment of debt. A high ratio indicates that a company is better able to pay back its debt, and is thus able to take on more debt if necessary.

3. Free Cash Flow (FCF) can be calculated Using- EBIT(1-Tax)+depreciation and amortization - changes in working capital in 2014-2013 - Working capital.

OR as we have already calculated the operation cash flow we can also use :

Cash flow from operating activities + interest expense - tax impact on interest - capital expense(capex)