DECISION CASE 12-1

1. The direct cash flow method begins with cash transactions such as receiving and paying cash, ignoring
non-cash transactions. On the other hand, the indirect cash flow method starts the calculation from net
income and adjusts the rest.

As both Kellogg’s and General Mills uses net income/earnings while preparing the operating activities
section of their statements of cash flows. So, they are using the indirect method.

2.For Kellogg’s the net cash provided by operating activities decreased from $ 1,643 million in 2009 to $
1,008 million in 2010 (1643 – 1008 = 635). Overall net cash provided by operating activities of Kellogg’s
decreased to $ 635 million. The largest adjustment to reconcile net income to net cash provided by
operating activities was Depreciation and amortization for $ 392 million.

For General Mills the net cash provided by operating activities increased from $ 1,828.2 million in 2009
to $ 2,181.2 million in 2010 (2181.2 – 1828.2 = 353). Overall net cash provided by operating activities of
General Mills increased to $ 353 million. The largest adjustment to reconcile net income to net cash
provided by operating activities was Depreciation and amortization for $ 457.1 million.

3.

KELLOGG's GENERAL MILLS

Year 2009 2010 2009 2010

Amount for
property
377 474 562.6 649.9
& Equipment
(MILLIONS USD)

4.Primary source of financing for General Mills is from increase in notes payable from previous year by
1626.3 million USD and from sale of class A limited membership interest in GMC which values to 388.8
million USD.

Primary source of financing for General Mills is from issuance of common stock (204 million USD) and
issuance of long-term debt (987 million USD).
Yes, both the companies have bought back the issued common stocks from the market. Kellogg’s have
repurchased shares of value 1052 million USD while General Mills have repurchased 691.8 million USD
of shares. The reason can be to decrease the percentage of shares available in the market and increase
their holding in their respective companies.

DECISION CASE 12-2

1.

KELLOGG's GENERAL MILLS

YEAR DEBT (millions USD) YEAR DEBT (millions USD)

2011 149 2011 275.1

2012 126 2012 287.9

2013 94 2013 299.5

2014 66 2014 310.3

2015 47 2015 323.5

AVERAG
AVERAGE 96.4 299.26
E

CASH 1008 CASH 2181.2

 FLOW
FLOW FROM
FROM OPERATI
OPERATING NG
ACTIVITIES ACTIVITI
MILLIONS ES
USD) MILLION
S USD)

CAPITAL CAPITAL
EXPENDITU EXPENDI
RES TURES
(MILLIONS (MILLIO
474 649.9
NS

USD) USD)

ADEQUA
ADEQUACY
5.539419087 CY 5.116955156
RATIO
RATIO

ADEQUACY RATIO = (CASH FLOW FROM OPERATING ACTIVITIES - CAPITAL EXPENDITURES)/

AVERAGE AMOUNT OF DEBT MATURING NEXT 5 YEARS

2.Kellogg’s adequacy ratio is slightly higher than the General Mills adequacy ratio.
Adequacy ratio tells us about whether the company’s cash flow will be sufficient to repay its average
annual debt over the next five years or not. In the above cases, both the company’s adequacy ratio tells
us that they have enough cash flows to meet their debt for the next five years.