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    Accounting Questions McCormick & Company 2009 Annual Report

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    The questions are related to McCormick & Company 2009 annual report.

    http://www.mccormickcorporation.com/

    Problem 1

    The following questions all relate to McCormick's 2009 Statements of Cash Flow,
    Balance sheet, and Income Statement.

    (1) The change in accounts receivable, net of allowance in the balance sheet is $15.4
    ($380.7 mm-$365.3mm), yet the cash flow statement states that accounts receivable
    decreased by $45.8 million. Conjecture why this might be so.

    (2) McCormick's cash flow statement states that they spent $82.4 million on capital
    expenditures. Assuming that all capital expenditures relate to property and equipment, determine
    the amount of property and equipment sold at historical prices. See Footnote 17 (p.63) for a better
    description of property, plant and equipment.

    (3) In footnote 17 McCormick reports supplemental information on inventories. Assuming that
    McCormick sales of finished goods is identified as cost of goods sold, determine the cost of
    goods manufactured during the year.

    (4) McCormick Reports an accounts payable of $283.6 on November 30, 2009. What does this
    account relate to?

    (5) Assume that all the trade accounts payable reported in the balance sheet on p. 41 is for
    purchases of raw materials. Assuming that McCormick purchased $500 million of raw materials,
    determine the cash paid for the raw materials.

    Problem 2
    The following questions relate to the stockholder's equity section of the CBS.

    (1) What is the number and dollar value of common stock outstanding on November 30,
    2009?

    (2) McCormick has voting and non-voting shares. Suggest some reasons why a company
    would want to have two types of common shares.

    (3) Assuming all shares were issued at the same time, determine the market value of the
    voting and non-voting shares at the time they were issued.

    (4) Why would the issue price for the two types of shares be different?

    (5) Report the amount of cash dividends declared for common stockholders in 2009. Assume the
    company declares and pays the same amount of dividends for voting and non-voting shares. Is
    this amount different from the amount paid for cash dividends reported in the cash flow
    statement? Why or why not?

    Problem 3
    (1) Note 1 (P45) states that McCormick expenses the cost of advertising in the period in
    which they first run. Since advertising has probable future benefits, is
    McCormick violating GAAP? If not, justify the policy.

    2) Note 1 (p.45) states that software development cost is being capitalized by the firm.
    However, Not 2 (p.45) states that all research and development costs are being expensed
    as incurred. Justify what appears to be two contradictory statements.

    3) Note 1 (p.45) states that prepaid allowances are capitalized and amortized against net
    sales. Provide an example of simple income statement that shows how the amortization
    of prepaid is reported.

    4) Note 1 (P44) and Footnote 17 (p.63) states that McCormick uses the straight-line
    method for depreciation reporting. Assume there is no salvage value for the plant and
    equipment.

    (a) Determine the approximate average useful life of depreciable assets held by
    McCormick.

    (b) Determine how long depreciable assets held by McCormick have been used, on
    average.

    (c) Assuming McCormick does not purchase any further assets the following year and
    decides to use the double declining depreciation method in 2010, determine the expected
    depreciation for fiscal year 2010.

    (5) In the Consolidated Cash Flow Statement, the depreciation and amortization is added
    to net income to determine operating cash flows. Would McCormick's cash flows increase
    more if the company had reported twice as much depreciation and amortization in the income
    statement?

    Problem 4

    (1) Yahoo Finance states McCormick's P/E ratio as 16.46 on Nov. 15, 2010. Explain what this
    means.

    (2) Yahoo Finance shows that the price to book ratio for the most recent quarter is 4.24 on Nov.
    15, 2010, and the P/E ratio is 16.46. How are these two ratios related?

    (3) Yahoo Finances shows that price to sales ratio is 1.77 and the P/E ratio for the trailing twelve
    months is 16.46. How are these two ratios related?

    (4) Yahoo Finance reports McCormick ROA as 9.71% and ROE as 26.09% on November 15,
    2010 for the training twelve months. Justify why ROE is nearly three times higher than ROA.

    Problem 5
    This problem relates to the Cash Flow statement in P.42 and the Note 6 (p. 48 and 49).

    a) McCormick reports that it issued a $250 million of 5.25% notes due 2013 with net cash
    proceeds received of $248.0 million. Determine McCormick's market or borrowing rate.
    (Hint: use the Rate function in Excel)

    b) McCormick's also reports that on December 2007 issued another $250 million, 10
    year bond with a coupon rate of 5.75%. Assume this is a semi-annual bond and the
    expected yield (or market) rate is 6.25%. Determine the cash proceeds from this bond.
    (Hint: please do not use the $248.3 million they report)

    c) McCormick's reports expected rental expense under operation leases on p.49. If all the
    operating leases were converted to capital leases at McCormick's borrowing rate of
    6.25%, by how would assets and liabilities increase. Assume all payments after
    2014 are expected to be paid in 2015. (Hint: please use the NPV function in Excel)

    d) Recalculate the debt to equity ratio following the conversion of operating leases to
    capital leases and explain how this might affect the company's risk rating.

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    Answer:
    Problem 1:
    The change in accounts receivable, net of allowance in the balance sheet is $15.4 ($380.7 mm-$365.3mm), yet the cash flow statement states that accounts receivable decreased by $45.8 million. Conjecture why this might be so.

    Answer:
    The main reason behind this difference is:
    Exchange rate fluctuation: Due to exchange rate fluctuation the trade accounts receivables increased by $37 million.
    Reclassification: Other receivables of $34 million reclassified from trade account receivables to prepaid expenses and other current assets.
    McCormick's cash flow statement states that they spent $82.4 million on capital expenditures. Assuming that all capital expenditures relate to property and equipment, determine the amount of property and equipment sold at historical prices. See Footnote 17 (p.63) for a better description of property, plant and equipment.

    Answer:
    We have,
    Property, Plant and Equipment (2009)=$489.8 million
    Capital expenditure=$82.4 million
    Property, Plant and Equipment (2008)=$461.1 million
    Hence,
    Sale of Property,Plant and Equipment=$461.1-($489.8-$82.4)=$53.7 million

    In footnote 17 McCormick reports supplemental information on inventories. Assuming that McCormick sales of finished goods are identified as cost of goods sold, determine the cost of goods manufactured during the year.

    Answer:
    We have,
    Cost of good sale=$1,864.9 million
    Finished goods (2009)=$237.6 million
    Finished goods (2008)=$230.7 million
    Hence,
    Cost of goods manufactured during the year=$230.7+$1,864.9-$237.6=$1,858 million
    McCormick Reports an accounts payable of ...

    Solution Summary

    Accounting questions based on McCormick and Company 2009 annual report is examined.

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