Case 4-4 Campbell Soup Company

Case 4-4

Campbell Soup Company

a)      Compute Campbell Soup’s Working Capital Working Capital at the end of Year 11.

Working Capital= Current Assets – Current Liabilities

                                      = $1,518.5-$1,278                                                                                       

                                    = $240.5 millions

The working capital for Campbell Soup is $240.5 millions in Year 11 and it is decreasing over the years. Decreasing working capital over the period of years is critical to the company. Following reasons are the cause of decreasing working capital.

 This decrease in working capital is a resulted by $235.5 million decrease in current assets regardless of changes in cash and temporary investments. Receivables are down $97.1 million and inventories declined $113.3 million from year 10. Accounts payables are down 42.8 million because of reduced inventory levels and divestitures.

Interest expenses is increased in year 11 due to timing of fourth quarter borrowings in order to obtain favorable Long Term interest rates, thus it increases current liabilities which reduces working capital.

Due to the improved asset management and the restructuring program over three years period, working capital is reduced.

The change in inventory method, FIFO to LIFO also reduces the working capital as inventory and current ratios are understated

         The current liabilities also include present value of lease payments of $6.7 million from capital lease. This has reduced the working capital since its payment is recorded in Income Statement as expenses thus increasing liabilities affecting working capital.

b)      Campbell has extended credit to its customers such as retail grocery store, mass merchandisers, and convenience stores. The bad debt reserve for these receivables is $16.3 million. The percentage of total receivables uncollectible is 3.1%.

            In year 11, the bad debt reserve is reduced by $3.6 million compared to Year 10 which was $19.9 million. The reduction in the bad debt reserve could be due to increase in sales of cash, may be customers are paying off the debt which are already written-off, or may be the Campbell Soup changed its credit policy, interest rates or discounts policies.

c)      Campbell Soup is using LIFO inventory method as its cost flow assumption.

LIFO method is generally accepted accounting standard method adopting in the United States for the purpose of recording companies inventories. The reasons for the company adopting LIFO method instead of FIFO are:

During inflation, LIFO results in lower income and lower inventory balances than when FIFO is used. The reason for this is LIFO expenses the most recent cost of inventory, and retains the cost of the oldest items in the inventory. The inventory turnover ratio will be higher when LIFO is used when prices are increasing. As a result, the cost of goods sold will be higher than the inventory costs.

LIFO records the sale of the most expensive inventory first and thereby decreases profit and reduce taxes and also it matches current cost against current revenue. Its inventories write-down policy is the lower of cost or market.

LIFO is preferable during the time of products costs are changing as it matches the latest costs of products with the sales revenues of the current period.

d)     The inventory turnover ratio (cost of goods/average inventory) is a measure of inventory management efficiency and effectiveness. Compute the inventory turnover ratio for Campbell Soup and comment on ways that it might improve the ratio.
Inventory turnover ratio= Cost of goods sold/ Average Inventory

                        = $4095.5/$706.7

  = 5.79 times

Campbell Soup’s Inventory turnover ratio 5.79 times is very low which indicates the poor inventory management. In order to improve inventory turnover ratio, company should perform following steps:

-          By increasing sales, since Campbell USA and Campbell Canada sales is decreasing in year 11 compared to year 10

-          Reducing its internal and external lead times from vendors and suppliers.

-          Reducing purchase transaction costs from raw material distributors and set-up cost from manufacturers.

-          Optimizing material flow by working closely with its suppliers.

-          Adopting Just-In-Time or Lean manufacturing techniques to avoid any inventory piled up in the warehouse.

- Inventory turnover also can be increased based on seasonality of the business. Since Campbell Soup mainly focused on soup business, the demand for their product increases in fall and winter. During this time the company should produce enough inventories and make deliveries and decreases production during off time. By doing this they can reduce inventories in their warehouses. 

e)      The LIFO reserve for Campbell Soup in Year 11 is $89.6 million and $84.6 million in Year 10.  

The total tax benefit realized by Campbell Soup as of the end of the fiscal Year 11 is calculated as follows:

         Deferred Tax Payable= LIFO reserve x Tax rate

                                            = $89.6 x 0.35

                                            = $31.36 million

f)        

= Sales-Total cost and expenses + Equity in earnings of affiliates-Minority interests

= $6,204.1- $5531.9 +$2.4 -$7.2

= $667.40 million

Note: $5 million LIFO reserve is deducted from cost of goods sold as in FIFO, the costs of goods sold will decrease, but increase inventory cost.

g)      Percentage of Total assets= Plant assets/fixed assets x100%

                                                                  = $1790.4/$4,149 x100%

                                                                  = 43.15%

The percentage of total assets has increased to 43.15% compare to 41.74% in Year 10. It indicates that the investment in Year 11 has increased.

Campbell Soup has used Straight line depreciation method.

Percentage of Accumulated depreciation is calculated as follows:

         = $1,131.5/ 2630.5 million

         = 43.01%

The accumulated depreciation reveals that how much the fixed assets have been depreciated from the time of purchased. Here, in this case Campbell Soup company’s Plant assets have been depreciated by 43.01% or value has been used. Thus this percentage reveals that the company has to expend more cash for its repair or maintenance.

h)      The major transaction that gave rise to this amount is from acquisition of different businesses. They acquired $180 million of publicly held shares of the company’s 71% owned subsidiary, Campbell Soup Company Ltd. in Canada, which processes, packages and distributes a wide range of prepared foods exclusively in Canada under many of the Company’s brand names. Intangible assets increased $52.1 million ($ 435.5-$383.4) as the acquisitions resulted in $132.3 million of additional goodwill, selling of businesses or restructuring the business of $1.5 million, and also we can assume they may have giving out licensing to other businesses.