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Broadening Your Perspective

Financial Reporting and Analysis

BYP3-1

FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries Inc.

The financial statements of Tootsie Roll in Appendix A at the back of this book contain the following selected accounts, all in thousands of dollars.

Common Stock	$ 24,862
Accounts Payable	9,140
Accounts Receivable	37,512
Selling, Marketing, and Administrative Expenses	103,755
Prepaid Expenses	8,562
Net Property, Plant, and Equipment	220,721
Net Product Sales	495,592

Instructions

(a)

What is the increase and decrease side for each account? What is the normal balance for each account?

(b)

Identify the probable other account in the transaction and the effect on that account when:

1.	Accounts Receivable is decreased.
2.	Accounts Payable is decreased.
3.	Prepaid Expenses is increased.

(c)

Identify the other account(s) that ordinarily would be involved when:

1.	Interest Expense is increased.
2.	Property, Plant, and Equipment is increased.

BYP3-2

COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Hershey

The financial statements of The Hershey Company appear in Appendix B, following the financial statements for Tootsie Roll in Appendix A.

Instructions

(a)

Based on the information contained in these financial statements, determine the normal balance for:

Tootsie Roll Industries

The Hershey Company

1.	Accounts Receivable
2.	Net Property, Plant, and Equipment
3.	Accounts Payable
4.	Retained Earnings
5.	Net Product Sales

1.	Inventories
2.	Provision for Income Taxes
3.	Accrued Liabilities
4.	Common Stock
5.	Interest Expense

(b)

Identify the other account ordinarily involved when:

1.	Accounts Receivable is increased.
2.	Notes Payable is decreased.
3.	Machinery is increased.
4.	Interest Revenue is increased.

Financial Reporting and Analysis

BYP4-1

FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries, Inc.

The financial statements of Tootsie Roll are presented in Appendix A

Instructions

(a)	Using the consolidated income statement and balance sheet, identify items that may result in adjusting entries for deferrals.
(b)	Using the consolidated income statement, identify two items that may result in adjusting entries for accruals.

(c)	What was the amount of depreciation expense for 2009 and 2008? (You will need to examine the notes to the financial statements or the statement of cash flows.) Where was accumulated depreciation reported?
(d)	What was the cash paid for income taxes during 2009, reported at the bottom of the consolidated statement of cash flows? What was income tax expense (provision for income taxes) for 2009?

BYP4-2

COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Hershey

The financial statements of The Hershey Company are presented in Appendix B, following the financial statements for Tootsie Roll in Appendix A.

Instructions

(a)	Identify two accounts on Hershey's balance sheet that provide evidence that Hershey uses accrual accounting. In each case, identify the income statement account that would be affected by the adjustment process.
(b)	Identify two accounts on Tootsie Roll's balance sheet that provide evidence that Tootsie Roll uses accrual accounting (different from the two you listed for Hershey). In each case, identify the income statement account that would be affected by the adjustment process.

Appendix A

Financial Statements and Accompanying Notes

The standard set of financial statements consists of: (1) a comparative income statement for three years, (2) a comparative balance sheet for two years, (3) a comparative statement of cash flows for three years, (4) a statement of retained earnings (or stockholders' equity) for three years, and (5) a set of accompanying notes that are considered an integral part of the financial statements. The auditor's report, unless stated otherwise, covers the financial statements and the accompanying notes. The financial statements and accompanying notes plus some supplementary data and analyses for Tootsie Roll Industries follow.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Assets

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES	(in thousands)
	December 31,

	2009	2008
CURRENT ASSETS:
Cash and cash equivalents	$ 90,990	$ 68,908
Investments	8,663	17,963
Accounts receivable trade, less allowances of $2,356 and $1,923	37,512	31,213
Other receivables	8,397	2,983
Inventories:
Finished goods and work-in-process	35,570	34,862
Raw materials and supplies	20,817	20,722
Prepaid expenses	8,562	11,328
Deferred income taxes	1,367	609
Total current assets	211,878	188,588
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land	21,559	19,307
Buildings	102,374	89,077
Machinery and equipment	296,787	279,100
Construction in progress	6,877	20,701
	427,597	408,185
Less—Accumulated depreciation	206,876	190,557
Net property, plant and equipment	220,721	217,628
OTHER ASSETS:
Goodwill	73,237	73,237
Trademarks	175,024	189,024
Investments	58,136	49,809
Split dollar officer life insurance	74,642	74,808
Prepaid expenses	8,068	10,333
Investment in joint venture	4,961	9,274
Deferred income taxes	11,580	824
Total other assets	405,648	407,309
Total assets	$838,247	$813,525

(The accompanying notes are an integral part of these statements.)

Liabilities and Shareholders' Equity

	(in thousands except per share data)
	December 31,

	2009	2008
CURRENT LIABILITIES:
Accounts payable	$ 9,140	$ 13,885
Dividends payable	4,458	4,401
Accrued liabilities	42,468	40,335
Total current liabilities	56,066	58,621
NONCURRENT LIABILITES:
Deferred income taxes	44,582	45,410
Postretirement health care and life insurance benefits	16,674	15,468
Industrial development bonds	7,500	7,500
Liability for uncertain tax positions	21,101	19,412
Deferred compensation and other liabilities	39,839	32,344
Total noncurrent liabilities	129,696	120,134
SHAREHOLDERS' EQUITY:
Common stock, $.69-4/9 par value—120,000 shares authorized—35,802 and 35,658, respectively, issued	24,862	24,762
Class B common stock, $.69-4/9 par value—40,000 shares authorized—19,919 and 19,357, respectively, issued	13,833	13,442
Capital in excess of par value	482,250	470,927
Retained earnings, per accompanying statement	145,928	142,872
Accumulated other comprehensive loss	(12,396)	(15,241)
Treasury stock (at cost)—67 shares and 65 shares, respectively	(1,992)	(1,992)
Total shareholders' equity	652,485	634,770
Total liabilities and shareholders' equity	$838,247	$813,525

CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES	(in thousands except per share data)
	For the year ended December 31,

	2009	2008	2007
Net product sales	$495,592	$492,051	$492,742
Rental and royalty revenue	3,739	3,965	4,975
Total revenue	499,331	496,016	497,717
Product cost of goods sold	318,645	333,314	327,695
Rental and royalty cost	852	921	1,349
Total costs	319,497	334,235	329,044
Product gross margin	176,947	158,737	165,047
Rental and royalty gross margin	2,887	3,044	3,626
Total gross margin	179,834	161,781	168,673
Selling, marketing and administrative expenses	103,755	95,254	97,821
Impairment charges	14,000	—	—
Earnings from operations	62,079	66,527	70,852
Other income (expense), net	2,100	(10,618)	6,315
Earnings before income taxes	64,179	55,909	77,167
Provision for income taxes	10,704	17,132	25,542
Net earnings	$ 53,475	$ 38,777	$ 51,625
Net earnings	$ 53,475	$ 38,777	$ 51,625
Other comprehensive earnings (loss)	2,845	(3,514)	810
Comprehensive earnings	$ 56,320	$ 35,263	$ 52,435
Retained earnings at beginning of year.	$142,872	$156,752	$169,233
Net earnings	53,475	38,777	51,625
Cash dividends	(17,790)	(17,492)	(17,421)
Stock dividends	(32,629)	(35,165)	(46,685)
Retained earnings at end of year	$145,928	$142,872	$156,752
Earnings per share	$ 0.95	$ 0.68	$ 0.89
Average Common and Class B Common shares outstanding	56,072	56,799	58,227

(The accompanying notes are an integral part of these statements.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES	(in thousands)
	For the year ended December 31,

	2009	2008	2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$ 53,475	$ 38,777	$ 51,625
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	17,862	17,036	15,859
Impairment charges	14,000	—	—
Impairment of equity investment in joint venture	4,400	—	—
Loss from joint venture	233	477	—
Return on investment in joint venture	—	—	1,419
Other than temporary impairment	—	5,140	—
Amortization of marketable securities	320	396	521
Purchase of trading securities	(1,713)	(491)	(84)
Changes in operating assets and liabilities:
Accounts receivable	(5,899)	(261)	2,591
Other receivables	(2,088)	(33)	7
Inventories	(675)	1,352	6,506
Prepaid expenses and other assets	5,203	(15,139)	283
Accounts payable and accrued liabilities	(2,755)	967	(3,234)
Income taxes payable and deferred	(11,731)	8,642	13,481
Postretirement health care and life insurance benefits	1,028	3,394	1,272
Deferred compensation and other liabilities	3,316	(2,385)	(12)
Other	305	(830)	(170)
Net cash provided by operating activities	75,281	57,042	90,064
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate and other assets	—	—	434
Return of investment in joint venture	—	—	1,206
Capital expenditures	(20,831)	(34,355)	(14,767)
Purchase of available for sale securities	(11,331)	(33,977)	(59,132)
Sale and maturity of available for sale securities	17,511	61,258	28,914
Net cash used in investing activities	(14,651)	(7,074)	(43,345)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares repurchased and retired	(20,723)	(21,109)	(27,300)
Dividends paid in cash	(17,825)	(17,557)	(17,542)
Net cash used in financing activities	(38,548)	(38,666)	(44,842)
Increase in cash and cash equivalents	22,082	11,302	1,877
Cash and cash equivalents at beginning of year	68,908	57,606	55,729
Cash and cash equivalents at end of year	$ 90,990	$ 68,908	$ 57,606
Supplemental cash flow information:
Income taxes paid	$ 22,364	$ 12,728	$ 11,343
Interest paid	$ 182	$ 252	$ 537
Stock dividend issued	$ 32,538	$ 35,042	$ 46,520

(The accompanying notes are an integral part of these statements.)

AppendixB

Appendix B

Specimen Financial Statements: The Hershey Company