Nestlé Group is one of the world’s largest food and beverage

Nestlé Group is one of the world’s largest food and beverage companies, selling 10,000 different products ranging from milk and diary, to chocolate and pet food. Access a copy of the company’s comparative financial statements for the year ended December 31, 2009, from the company’s website (www.nestle.com).

Instructions

(a) Prepare a summary report of Nestlé’s cash activities during its year ended December 31, 2009, and 2008, at the subtotal level of operating, investing, and financing activities, and a comparative report for the preceding fiscal year. Are there major differences at this level between the two periods? Explain. How is the company using any excess operating cash flows after investing activities?

(b) Identify what major differences there are between the company’s accrual-based income and its cash flow from operating activities over the past two years.

(c) Prepare a short report summarizing Nestlé’s investing cash transactions and its financing cash transactions for 2009.

(d) How has the company classified interest paid, interest received, income taxes paid, dividends received, and dividends paid? What were the amounts for these items during 2009?

(a) The amounts of cash inflows and outflows at the sub-total level in 2009 and 2008 are presented below.

(in millions of CHF)	2009	2008
Operating	17,934	10,763
Investing	(5,399)	4,699
Financing	(12,361)	(16,884)
Currency translations	(184)	663
Net increase/decrease	(10)	(759)
Cash and Cash Equivalents, beginning of the year	5,835	6,594
Cash and Cash Equivalents, end of the year	5,825	5,835

At the sub-total level, it was noted that the source of cash for financing activities was operating activities in both years and investing activities in 2008 only. . The operating cash flows in 2008, along with cash inflows from investing activities were slightly short to cover cash outflows from both investing and financing activities.  After considering an inflow due to currency translations, the net impact was a decline of CHF 759 million in cash and cash equivalents.

Again, in 2009, the cash inflows from operating activities were enough to cover investing and financing outflows.

  For both 2008 and 2009, the company is using excess cash flows from operations, after including the impact of investing cash flows to buy back shares and pay dividends to shareholders. 

 (b) Information is taken from the statement of cash flows and note 22.

In millions of CHF	2009	2008
Net income	11,793	19,051
Share of results of associates	(800)	(1,005)
Depreciation and amortization	3,369	3,249
Impairment losses	227	810
Net result on disposal of business	(105)	(9,252)
Non-cash items in financial assets and liabilities	315	(759)
Deferred taxes	229	(1,090)
Taxes in other comprehensive income and equity	82	1,454
Inventories	1,099	(1,523)
Trade payables	444	78
Other current assets	(487)	(870)
Other current liabilities	1,469	515
Total of other smaller amounts	299	105
Operating cash flow	17,934	10,763

As can be seen from the above schedule, the large amounts of depreciation, amortization and impairment loss add backs resulted in an increase in cash flows from operations of CHF 3,596 million and CHF 4,059 million for 2009 and 2008, respectively.  In 2008, there was a large deduction of $9,252 million due to a discontinued business that resulted in operating cash flow being lower than net income for that year. The other differences result from changes in deferred tax balances and working capital items.

(c) Investing activities presented on Nestlé’s statements of cash flows show the detail of investing cash transactions for 2009. While there was investing cash inflows in 2008 due to the sale of a business, the company used cash for investing activities in 2009. The company invested in property, plant and equipment and some intangible assets, and business acquisitions in 2009.  There was a small amount from the disposal of a business and sale of assets.  There was also a small amount from associates. The financing activities in 2009 resulted in dividends being paid and shares being repurchased.  The company also had some new long term debt issued and some debt repaid.  Finally, there was a large outflow for short term investment purchases.  Other smaller amounts of cash flows were paid to non-controlling interests and some net inflows and outflows related to financial liabilities.

(d)  As indicated in note 22, the company paid or received the following amounts:

In millions of CHF	CHF
Interest paid	(566)
Interest received	97
Income taxes paid	(2,758)
Dividends paid (includes non-controlling interest also)	(5,779)
Dividends received	400

As per note 22, the company states that these above amounts have been “allocated to the appropriate headings in the cash flow statement.”  This statement is not very helpful and leaves the reader trying to figure out where these amounts have been included.  As can be seen from the statement of cash flows, dividends paid have been included in financing activities.  All the other items  appear to have been included in operating activities, since there does not seem to be any adjustments to operating cash flows to back out interest expense, interest income or dividend income.