The project is intended to give you the opportunity to develop your critical thinking ability by applying, integrating and extending the knowledge you have gained in class. It will also work on your communication skills.Assignment
You have just joined the accounting group at Johnson & Johnson (J&J). You have been asked to get up to speed on their long-lived assets and implications of their associated accounting choices. Your assignment is to write a business memo to the Controller summarizing the results of your investigation. Your write-up should be 1 page plus a table or appendix with any supporting numbers/analysis. You will need to do/consider the following:
Obtain a copy of Johnson & Johnsons latest annual fiscal statements (FY2014).
Review the financial statements and associated footnotes focusing on disclosures related to property, plant and equipment, intangible assets and goodwill.
How does J&J depreciate its property and equipment and amortize its intangibles (what policies do they follow)? What was the amount of depreciation expense in 2014 and 2013? What was the amount of amortization expense in 2014 and 2013? Does the increase or decrease for each make sense? Why or why not?
The cash flow statement reports that cash paid for additions to property, plant and equipment totaled $3,714,000,000 in 2014. Assume $2,228.4 million of this balance was for machinery and equipment. Further assume that the machinery and equipment have an expected useful life of five years with a salvage value of $378.6 million. Prepare a table comparing the depreciation expense and net book value of the machinery and equipment purchased in 2014 over its expected useful life assuming the company uses the straight-line depreciation method and the double-declining balance method. In both cases, assume the company recorded a full year of depreciation in 2014.
Using the formulas in the textbook (pages 627-628) calculate asset turnover and rate of return on assets (ROA) for J&J in 2014. How does this compare to Mercks 2014 asset turnover of 42.95% and ROA of 12.14%? Would a change in depreciation policy to double declining balance for machinery & equipment (as calculated above) have a noticeable impact on these ratios?