Essay Instructions: Johnson and Johnson Annual Report
Your answers should be recorded on this question paper in the space provided. You may type in your answers in the spaces provided leaving as much space as you feel necessary to type in the applicable answer. Questions which must be answered are italicized. After you have reviewed your work and would like to submit it please go to the Johnson and Johnson .
It is easiest to answer almost all of these questions by looking at the 2012 Johnson and Johnson annual report.
The Johnson and Johnson Annual Report for 2012 can be found on line at http://files.shareholder.com/downloads/JNJ/3x0x644760/85FD0CFF-2305-4A02-8294-2E47D0F31850/JNJ2012annualreport.pdf
Some questions involve simply typing in a number. For these questions nothing but the needed number is required. In contrast questions requiring calculations should show how the applicable number was computed.
Many questions are open ended. In some cases class members may be tempted to write extensively when answering certain questions. For the most part this is not needed. Most questions can be answered succinctly. That said no one will be penalized for writing too much; as always the quality of an answer is more important than its quantity. The important thing is to answer all questions completely and accurately. This is not meant to be a difficult assignment.
Please answer the following questions based on information contained in this Annual Report.
Part I ? Consolidated Balance Sheets
How much are the company?s total assets, total liabilities and shareholder?s equity as of December 31, 2012?
A. Total Assets =
Total Liabilities =
Total Shareholder?s Equity=
See Note 3 at the end of this question paper in regards to the term ?shareholder?s equity?.
B. How much is the company?s retained earnings as of December 31, 2012? (Be careful in entering this number because the number just below it is a subtotal that one might easily confuse with the retained earnings amount).
C. How many shares of common stock has the company been authorized to issue and how many shares has it issued?
.
D. How much cash (called cash and cash equivalents on the Johnson and Johnson Consolidated Balance Sheet) did the company have as of December 31, 2011?
.
E. By how much did the company?s cash (called Cash and Cash Equivalents on the company?s Consolidated Balance Sheet) decrease during 2012?
F. By how much did the company?s cash (called Cash and Cash Equivalents on the company?s Consolidated Balance Sheet) increase during the prior year, that is, 2011? (To obtain this information go to the Company website to locate an online version of Johnson and Johnson?s prior year (2011 annual report). The company?s website can be found at www.jnj.com. Follow the link to Investor Relations and the Company?s 2011 Annual Report. Once you access the annual report go to the company?s consolidated balance sheet so that you can determine the extent to which the company?s cash (called Cash and Cash Equivalents on the company?s Consolidated Balance Sheet) increased during the prior year, that is, during 2011?
Part II ? Consolidated Statements of Earnings (Page 21) (See note 4 at the end of this document for more information about Consolidated Statements of Earnings and the term ?Net Earnings?).
A. Why do you think Johnson and Johnson financial statements are called consolidated i.e. ?Consolidated Balance Sheets? and ?Consolidated Income Statements?? (Hint: This is not discussed in our textbook but if you look at the first paragraph of Footnote 1 on page 25 of the Company?s Annual Report you will have a better idea of what it means.)
B. Why do you think the company?s consolidated balance sheets shows the company?s assets, liabilities and shareholder?s equity for two years and the consolidated statements of net earnings shows the net earnings for three years (2012, 2011, and 2010)? In other words why isn?t the information shown just for one year, that is, 2012. After all we are looking at the company?s 2012 annual report.
C. How much is the company?s net earnings for 2012? (See Note 4 at the end of this document
for more information about the term ?net earnings.?).
D. Does the increase in the company?s net earnings from when comparing 2012 to 2011 necessarily mean that the company has gone beyond the problems that caused its net income for 2011 to be significantly less than was in 2010 or would you want additional information?
E. What has the trend been over the last three years in regards to Johnson and Johnson?s
net earnings? Are you comforted by this trend or would you have like to have seen earnings go one way or another in a consistent manner.
F Johnson and Johnson?s revenues for 2012 were more than $2.2 billion higher than they were in 2011with what seems to have been a predicable increase of about $842 million in net income. Now consider the prior year 2011 when revenues went up even more almost a $3.5 billion from the year earlier 2010 yet the company?s net earnings were considerably lower (slightly more than $3.6 billion lower) than they were during the previous year. What factors based on the information shown on the company?s ?consolidated statement of earnings? led to such a large decrease in net income in comparing 2011to 2010 at the same time that revenues increased so much? What insights might be drawn from the applicable items that increased or decreased and the more predictable looking result associated with the 2012 revenue increase of a little more than $2.2 billion?
G There appears to be no specific footnote number that relates to the $1 billion, 626 million 2012 ?consolidated statement of earnings? item entitled ?other (income) expenses, net?. This item decreased to a greater extent from 2012 to 2011 than any other expense items listed on the company?s statement of earnings. While some information can be found about the large amount and decrease in this category on the left hand column on page 9 under the category ?other (Income) Expense, net? in the Management Discussion and Analysis of Results of Operations and Financial Condition? which begins on page 2 of the company?s annual report, I could not find it in any level of specificity in the company?s footnotes. Some categories shown on the company?s income statement indicate that a particular note to the company?s financial statements, (with these notes beginning on page 25 of the company?s annual report and extending through page 68), relates to a specific item on this statement thus providing additional information about the item being referenced. For example, Note 22 which deals with ?Restructuring? expenses is referenced on the face of the company?s income statement. In addition, and Note 8 dealing with ?Provisions for Income Tax? (which is the company?s income tax expense) helps to explain how the amounts in these two categories were determined.
Do you feel the details regarding the category of expense entitled ?other (income) expenses, net are sufficiently delineated in the left hand column on page 9 so that users of the company?s financial statements are provided with needed information or do you feel this information should have been referenced and explained in the company?s statement of earning with an appropriate footnote describing the composition of this large amount. Please explain your answer.
H. Note that in contrast to its prior year annual reports, Johnson and Johnson in its 2012 annual report has an item on its income statement for 2012 entitled ?net loss attributable to non-controlling interest?. This line item reflects the interest of shareholder of subsidiaries of Johnson and Johnson who are not shareholders of the parent company, Johnson and Johnson. See item in Blackboard Course Documents entitled ?Consolidated Financial Statements and Noncontrolling Interest in Subsidiary with Specific Reference to Johnson and Johnson?s Annual Report for 2012 to obtain some background information on the significance of this item.
After reading this document why is the net loss attributable to noncontrollable interest as shown on the Johnson and Johnson Annual Report for 2012 added rather than subtracted in determining ?net earnings attributable to Johnson and Johnson? Also, why do you believe Johnson and Johnson did not have any amounts shown in this category for either 2011 or 2010?
Part III-Consolidated Statements of Cash Flow (Page 24)
A Statement of Cash Flow as described on page 22 our textbook provides information about the cash receipts and payments for a company for a specific time period. A statement of cash flow answers questions such as:
1. ?Where did the cash come from during the period?
2. What was the cash used for during the period?
3. What was the change in the cash balance during the period??
The Johnson and Johnson Consolidated Statement of Cash Flow shows, as is required under U.S. generally accepted accounting principles (GAAP), the following three categories of cash flows:
1 Cash Flow from Operating Activities
2 Cash Flow from Investing Activities
3 Cash Flow from Financing Activities
A. How much was the company?s Net Cash Flow from Operating Activities for 2012?
B How much was the company?s Net Cash Flow from Investing Activities for 2012?
C. How much was the company?s Net Cash Flows from Financial Activities for 2012?
Note that the amount of the company?s decrease in cash as you showed in your answer to question 1E should be the same as the amount of the company?s decrease in cash as shown on its statement of cash flows.
Note that the company?s almost $10 billion decrease in cash which occurred in 2012 happened in the same year in which company made over $10 billion in net earnings. Much of the reason for this seeming anomaly will be better understood later in the course when we go over an entire chapter on the Statement of Cash Flows.
Part IV ? Corporate Responsibility, Sarbanes-Oxley, and GAAP Related Questions
Our textbook on pages 7 and 8 mention various accounting scandals which have created a bad impression about the accounting profession.
In response to the accounting scandals that happened in the U.S. the U.S. Congress enacted a law in 2002 the Sarbanes-Oxley Act (SOX) in the hopes that this new legislation would reduce the likelihood of future fraudulent financial accounting reporting. On page 376 of our textbook in a chapter which deals with internal controls the authors write the following:
?Under Sox, all publicly traded U.S. Corporations are required to maintain an adequate system of internal control. Corporate executives and boards of directors must ensure that these controls are reliable and effective. In addition, independent outside auditors must attest to the adequacy of the internal control system. Companies that fail to comply are subject to fines and company officers can be imprisoned. Sox also created the Public Company Accounting Oversight Board (PCAOB), which now establishes auditing standards and regulates auditor activity.?
On page 70 of the Johnson and Johnson annual report, the company?s CEO and CFO have both signed a statement entitled ?Management Report on Internal Control over Financial Reporting.? This statement discusses the effectiveness of the company?s internal controls, as required by the Sarbanes-Oxley (SOX) Act of 2002, the role of PricewaterhouseCoopers (PWC), the independent auditor registered firm with the Public Companies Accounting Oversight Board (PCAOB) to conduct audits of publicly traded companies and the role played by the company?s audit committee and Executive Committee in financial oversight.
This statement seems to almost say that the financial statements included in the company?s annual report are the responsibility of the company?s management. But it does not. To find this statement one needs to go to the third sentence of the first paragraph on page 69 (the Report of the Independent Registered Public Accounting Firm) which specifically indicates that the ?Company?s management is responsible for these financial statements.?
A. Do you think the statement on page 70 signed by the company?s CEO and CFO should make it clear that these financial statements are the responsibility of the company?s management or is it adequate that this is indicated in the first paragraph on page 69 in the (the report of the Independent Registered Public Accounting firm?
B. Is it United States GAAP; is it International GAAP, (iGAAP)? Is it perhaps French GAAP or some other country?s GAAP? (Hint: For the answer look at the Company?s Annual Report once again on page 69 on the page which has the Report of the Independent Registered Public Accounting Firm. Locate the so-called ?auditor?s opinion?. This can be found in the first sentence of the first paragraph of the Report of the Independent Registered Public Accounting Firm.
Part V. Summary of Statistical Data:
Page 71 of the Johnson and Johnson annual report summarizes various statistical data over the past ten years for this company. Use this data to answer the following questions:
Net Earnings
A. Describe the general trend over the ten year period in regards to the net earnings of Johnson and Johnson.
B. In what year(s), if any, did net earnings decrease?
C. If you were a shareholder at Johnson and Johnson do you think the trend over the past ten years in regards to the company?s net earnings would please or displease you? (Explain)
Dividends paid per share.
D. Describe the general trend over the ten year period in regards to dividends paid per share to Johnson
& Johnson shareholders.
E. In what year(s), if any, did dividends paid per share decrease for Johnson and Johnson?
F. If you were a shareholder at Johnson and Johnson do you think the trend over the past ten years
in regards to the company?s dividends paying policy would please or displease you? (Explain)
Market Price per share
G. Describe the general trend over the ten year period in regards to the market price per share for
Johnson and Johnson stock.
H. If you were a shareholder at Johnson and Johnson do you think the trend over the past ten years
in regards to the company?s market price per share would please or displease you? (Explain)
I. In what year(s), if any, did the market price per share of the stock go down from the previous year?
J. Based on the Shareholder Return Performance Graphs on page 72 how much would $100 invested in
Johnson and Johnson stock on December 31,2002 be worth as of December 31, 2012 assuming that all dividends received on the stock had been reinvested in additional stock of the company?
K. The statistical information on page 70 shows that Johnson and Johnson net earnings and stock price have gone up significantly during the ten year period from 2002 to 2012. Net earnings, however, generally has gone up at a much faster rate than the company?s stock price. Describe two reasons that might explain this anomaly.
L. In footnote 18 on page 56 there is considerable detail regarding the sales and operating profit earned by each reporting segment (i.e., consumer products, pharmaceutical sales and medical device and diagnostic sales). . Information is further broken down in regard to the amount of sales in different parts of the world. Do you think this information might be useful to someone who might be interested in investing in the company?s stock? Might this information also be useful to the company?s competitors? If this information might be useful to a company?s competitors why would Johnson and Johnson provide this information in its annual report?
M. Revenues for 2012 Johnson and Johnson were $2 billion, $194 million greater than they were in 2011. Footnote 18 on pages 48-49 shows that pharmaceutical segments sales, and medical devices and diagnostics segment sales were higher than in the prior year whereas consumer segment sales were lower. Do you believe that the change in the company?s diversification, as measured by the change in its product segments sales, and where the company geographically sells its products is of any concern? In which three parts of the world did the company?s sales go up and in which part of the world did the company?s sales go down?
N. How many shares of treasury stock does Johnson and Johnson own as of December 31, 2012?
As we will learn in Chapter 13 treasury stock are shares of a corporation?s own stock which it buys in the market places. For example, from time to time Johnson and Johnson will buy its own shares. While some people have argued that such shares should be shown on a corporation?s own balance sheet as an asset generally accepted accounting principles (GAAP) does not permit this treatment. GAAP requires that the cost of treasury shares be shown as a reduction of a stockholder?s claims on corporate assets. In accordance with the above the cost of treasury shares owned by Johnson and Johnson should be shown on its balance sheets as a deduction from total paid in capital and retained earnings. In this regard the number of shares of treasury stock that Johnson and Johnson owns as of December 31, 2012 is shown on the line just above total stockholder?s equity at the very bottom of Johnson and Johnson?s balance sheet on page 20. For example, as shown at the very bottom of the company?s balance sheet for the prior year Johnson and Johnson as of December 31, 2011 owned 395,480,000 shares of its own stock
Treasury shares, as indicated on page 621 of our textbook, are often acquired by a company for such reasons as:
1. To reissue the shares to offices and employees under bonus and stock compensation plans.
2. To signal to the stock market that management believes the stock under priced, in the hopes of enhancing its market value.
3. To have additional shares available for use in the acquisition of other companies.
4. To reduce the number of shares outstanding and thereby increase earnings per share.
5. To rid the company of disgruntled investors??
O. Successful companies with a considerable amount of cash and relatively little debt are often viewed
as possible takeover targets. Johnson and Johnson and other very large companies often feel that they need not worry about being taken over by another company since they are ?just too big? in terms of the total price that would be needed to acquire control of the company.
Compute based, solely on the data in the Johnson and Johnson annual report, the total market value of Johnson and Johnson?s stock as of December 31, 2012. In performing this calculation you should know the following. As a general rule the number of outstanding shares of a company?s stock multiplied by the company?s stock market price per share is equal to the total market value (often referred to as market capitalization) of a company.
The number of outstanding shares is equals to the number of shares of a company?s stock, shown as issued in a company?s shareholder?s equity section of its consolidated balance sheet minus the number of shares of treasury stock. See the question before this one for more information about treasury stock)
After calculating the total market value of Johnson and Johnson?s stock do you feel that the company is just too big? in terms of the total price for someone to acquire control of the company?
P. The company?s statistical data on page 71 shows under the bold heading ?net earnings? an item entitled ?percent of sales to customers.? This is not a good descriptor of a commonly used ratio used in financial statement analysis which calculates the percentage of every dollar of sales which become net income. This percentage can be calculated by taking the total amount of the company?s net earnings and dividing it by its sales to customers. This ratio which is described on the bottom of page 853 of our textbook is often called ?profit margin? or simply ?margin?. This ratio was 16.1% in 2012 but only 14.9% in 2011. Please verify the computation f this ratio for these two years and indicate whether the trend appears positive or negative and why/?
By the way throughout our class we will be computing various ratios. Ratio analysis is a valuable tool in analyzing a company?s financial situation. In performing ratio analysis we will sometimes find it useful in comparing a company to itself. For example, the fact that Johnson and Johnson?s percent return on average shareholder?s equity was higher in 2012 than in 2011 might suggest a positive trend may be beginning. In performing ratio analysis we sometime compare a company to another company in the same industry as well as to industry averages.
Ratios are generally divided into three categories: liquidity, profitability and solvency. Other ratios involving profitability, beyond the one described above, for the calculation of percent return on average shareholder?s equity, are commonly used. These ratios generally use return, that is, net income as a numerator. For example, another ratio that is sometime used in measuring a company?s profitability is its return on total assets which is computing by taking net income and dividing by total assets. This ratio generally tells us how efficient a company was in generating net income on a given amount of assets. Like the percent return on average shareholder?s equity, and net income divided by sales ratio the higher this ratio the better.
Notes
An online version of Johnson and Johnson?s 2012 annual report is available at the company?s website at http://files.shareholder.com/downloads/JNJ/3x0x644760/85FD0CFF-2305-4A02-8294-2E47D0F31850/JNJ2012annualreport.pdf
1. For any question requesting a number you should write a number that makes sense. For example, consider if you were asked how much are the company?s total assets, total liabilities and shareholder?s equity as of December 31, 2011, your answer would be correct if you indicated that Total Assets as of December 31, 2010 were = to $113,644,000,000 or $113 Billion $644 Million or $113,644 (in Millions). It would be incorrect to indicate that total assets equal $113,644.
2. In regards to the balance sheet of Johnson and Johnson, our textbook refers on page 12 to the amount by which assets exceed liabilities as owner?s equity. Our textbook also suggests that this amount is often referred to as residual equity?that is the equity ?left over? after creditors? claims are satisfied. Corporations such as Johnson and Johnson most often use the term shareholder?s equity or stockholder?s equity to describe this amount. It is just another way to say the same thing. We will find quite a bit of this in accounting, that is, more than one term that describes the same thing. It?s no big deal. It?s just the way it is. Learning accounting is like learning a new language, the language of business. Once you learn the language it will seem easy.
3. Our textbook on page 23 states that ?the income statement lists revenues first, followed by expenses. Finally the statement shows net income (or net loss). When revenues exceed expenses, net income results. When expenses exceed revenues, a net loss results.? While our textbook refers to this statement as an income statement, Johnson and Johnson calls it a statement of earnings. A statement of earnings is just another name given by some companies to their income statement. Companies like Johnson and Johnson which call their ?income statement? a ?statement of earnings? are also likely to label the amount by which revenues exceeds expenses, ?net earnings? rather than ?net income?. Both terms are acceptable. As mentioned above in Note 3 in regards to the synonymous terms: ?stockholder?s equity and shareholder?s equity,? it is just another way to say the same thing.
