Overview:

Property, plant, and equipment posses certain characteristics that distinguish them from other assets owned by a business enterprise. In this project case, you will demonstrate how depreciation affects corporate financial statements.

Instructions:

1.) Review the information provided for Johnson & Johnson in the Financial Statement Analysis Case located in Chapter 10 (see attached forstatements)

2.) Answer the four questions

a.) What was the cost of buildings and building equipment at the end of 2014?

b.) Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?

c.) What was the actual interest paid by the company in 2014?

d.) What is Johnson & Johnson's free cash flow? From the information provided, comment on Johnson & Johnson's financial flexibility.

Johnson & Johnson, the world's leading and most diversified healthcare corporation serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below. 1. Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets: Building and building equipment 20-40 years Land and leasehold improvements 10-20 years Machinery and equipment 2-13 years 4. Property, Plant and Equipment At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were: (dollars in millions) 2014 2013 Land and land improvements $ 833 $ 885 Buildings and building equipment 10,046 10,423 Machinery and equipment 22,206 22,527 Construction in progress 3,600 3,298 36,685 Less accumulated depreciation 37,133 20,559 20,423 $ 16,126 16,710 The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was $115 million, $105 million and $115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was $2.5 billion, $2.7 billion and $2.5 billion, respectively. Johnson & Johnson provided the following selected information in its 2014 cash flow statement Johnson & Johnson 2014 Annual Report Consolidated Financial Statements (excerpts) Net cash flows from operating activities $18,471 Cash flows from investing activities Additions to property, plant and equipment (3,714) Proceeds from the disposal of assets 4,631 Acquisitions, net of cash acquired (2,129) Purchases of investments Sales of investments Other (primarily intangibles) Net cash used by investing activities (34,913) 24,119 (299) (12,305) Cash flows from financing activities Dividends to shareholders (7,768) Repurchase of common stock (7,124) Proceeds from short-term debt 1,863 Retirement of short-term debt (1,267) Proceeds from long-term debt 2,098 Retirement of long-term debt (1,844) Proceeds from the exercise of stock options/excess tax benefits Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents 1,782 (12,260) (310) Increase in cash and cash equivalents (6,404) Cash and cash equivalents, beginning of year (Note 1) 20,927 Cash and cash equivalents, end of year (Note 1) 14,523 Supplemental cash flow data Cash paid during the year for: Interest Income taxes $ 603 3,536