Introduction
Financial statements have gained considerable significance in the recent times. They are mainly used to present information pertaining to the financial position of a company, which is presented to the shareholde
rs, employees and the general public, as well as government agencies. Needless to say, the compilation and calculation of financial information in financial statements involves some level of expertise, especially considering that an individual would have to consider the existing systems, regulations and standards set by the accounting bodies of the country within which they operate. This gets even more complicated in instances where a company operates in different countries as is the case for Kellogg Company. Kellogg Company refers to a multinational food manufacturing company whose headquarters are situated in Battle Creek, Michigan. It is involved in the production of cereals, as well as convenience foods such as crackers, cookies, cereal bars, toaster pastries, frozen waffles, vegetarian foods and fruit-flavored snacks. The manufacture of its products is carried out in 118 countries while it is marketed in more than 180 countries all over the world. While its financial statement is bound to be undoubtedly complex, the accounting standards and procedures used in compiling it is always bound to be the same as any other company.
Day’s sales in Accounts Receivable
This refers to the average number of days that a company takes in order to collect the payments on the goods that it has sold. It may be used to determine whether there are any collections problems, as well as the pressure that is placed on the cash flows of the company. Numbers that exceed 40 to 50 days come as an indication of collection problems, thereby outlining considerable pressure being placed on cash flows. On the other hand, numbers that are way below the 40 to 50 range would underline overly-strict credit policies than may be preventing higher sales revenue (Wood & Sangster, 2005). These days are also referred to as debtor days or day sales in receivables. These are calculated using the formula: Average Accounts Payable x 365/sales revenue
Yearly accounts payable for Kellogg Company = 1402,000,000
Average accounts payable = 1402,000,000/365
Day’s sales in accounts receivable = (1,402,000,000/365 x 365)/14,197,000,000= 0.0987 days x 365 = 6 days.
Days Sales in Inventory
Days’ Sales in Inventory (DSI) refers to a technique for measuring the average amount of time that is required in order for a company to convert its inventory to sales. This may also be defined as the financial measure pertaining to the performance of the company that informs or gives the company’s investors an idea as to the length of time that the company would take to turn or convert its inventories or stock into sales. This inventory would not only include the goods themselves but also the work in progress in cases where such is applicable. In general, scholars note that it is better for a company to have a lower or shorter Days’ Sales in Inventory than a long one. This, however, does not negate the fact that there will be variations between the average Days’ Sales in Inventory in one industry and the others thanks to the variations in the operations. For instance, a business enterprise that deals with perishable goods such as raw vegetables and fruits is bound to have an extremely value pertaining to Days’ Sales in Inventory as compared to business enterprises that deal with non-perishable or long-term goods such as machinery and cars, which would have high values of the Days’ Sales in Inventory (DSI). On the same note, companies such as Kellogg Co. is bound to have a higher value of Days’ Sales in Inventory (DSI) than business enterprises that deal with raw fruits, vegetable and other consumer goods especially considering that it manufactures and packages them, thereby increasing the length of time within which they would perish or expire. A significant small number of days’ sales in inventory comes as an indication that the company is extremely efficient in selling off its inventory. A significantly large number of days, on the other hand, shows that the company may have made too much investment on inventory and may be incorporating obsolete inventory in its stores (Wood & Sangster, 2005). This may also be an indication that the management of the company has made a decision to keep high levels of inventory in order to attain high rates of order fulfillment. The figure represented by the days’ sales in inventory is used by external financial analysts to estimate the company’s performance using the ratio analysis. It is rarely used within the company as the employees have access to detailed reports that reveal the inventory items whose sale is worse or better than average (Wood & Sangster, 2005). In calculating the days’ sales in inventory, the annual average inventory is divided by the annual cost of goods sold then multiplied by 365.
(Opening inventory + Cost of goods sold – Closing inventory)/ cost of goods sold x 365
(1,174 + 8763 – 1365)/ 8763 x 365 = 357 days.
This means that the company is keeping too much inventory in its subsidiaries, probably, to ensure capacity to fulfill its high rates of order.
These may be compared with the financial statements for a multinational company such as Cracker Barrel Old Country Store, Inc. Cracker Barrel Old Country Store, Inc is a multinational company with subsidiaries in varied countries (Cracker Barrel Old Country Store Inc., 2012). It mainly deals in restaurants and gift shops unlike Kellogg Co. which deals with food manufacturing. However, both of them are multinational companies, in which case the compilation of their financial statements is bound to be more or less equally complicated or complex (Cracker Barrel Old Country Store Inc., 2012).
The company’s Days’ Sales in Accounts Receivable would, therefore, be computed as bellow. (Average Accounts Payable x 365/sales revenue)
Yearly Accounts Payable for Cracker Barrel Old Country Store, Inc = 39,704,000/365
Average Accounts payable= 108778.082
Days’ Sales in accounts Receivable = 108,778. 082/ 2,580,195= .04215886×365= 15
This means that the company has strict collection procedures, rules and regulations, which is expected for a restaurant especially considering that such enterprises would rarely provide goods and services for credit.
For the company’s Days’ Sales in Inventory
(Opening inventory + Cost of goods sold – Closing inventory)/ cost of goods sold x 365
in ‘000
(2,532+ 827,484 -1720)/ 827,484 x 365= 365 days
The Day’s Sales in Inventory for Cracker Barrel Old Country Store, Inc are quite high, which is surprising for a company that deals with perishable goods. This, however, may be as a result of the operations pertaining to the gift shops. Nevertheless, it means that the multinational company buys in bulk, probably to ensure that it has a steady supply of items even in instances where the gods used in its operations are in short supply. On the same note, it could be dealing in manufactured or packaged goods that have a long period before their expiry.
The financial statements of Kellogg Company are extremely complex especially considering that they incorporate the operations and entries of the subsidiaries. This is the same case for Cracker Barrel Old Country Store, Inc. On the same note, it is noted that the financial statements of both Kellogg Co and Cracker Barrel Old Country Store, Inc were prepared in line with the accounting principles that are fundamentally accepted in the United States of America, especially with regards to estimates, where the management of the company is required to make assumptions and estimates that affect the amounts of liabilities and assets that are reported, as well as the disclosure of the company’s contingent liabilities as at the financial statements’ date alongside the reported expenses and revenues in the reported periods (Kellogg Company, 2012). As it is noted, the actual results could be different from the estimates underlined in the financial statements. The financial statement captured the period between December 31st 201 and December 29th, 2012 (Kellogg Company, 2012). It is worth noting that there were varied modifications in policy that were undertaken within the year, which were reported via retrospective application of new policies to all the presented periods. On the same note, the financial statements undertook a consideration of the effect of recast pension, as well as postretirement benefit expense on the balances of capitalized inventory in prior periods (Kellogg Company, 2012).
References;
- Kellogg Company, (2012). Kellogg Company // Form 10-K For Fiscal Year 2012 (Ended December 29, 2012).
- Wood, F., & Sangster, A. (2005). Frank Wood’s business accounting 1. Harlow: Financial Times Prentice Hall.
- Cracker Barrel Old Country Store, Inc (2012). Cracker Barrel Old Country Store, Inc Form 10-K (Ended 3rd August 2012)