InstructionsReview the information provided for Johnson & Johnson in the Financial Statement Analysis Case located in the Using Your Judgement section in the Chapter 10 End of Chapter Material in your

Instructions

1. Review the information provided for Johnson & Johnson in the Financial Statement Analysis Case located in the Using Your Judgement section in the Chapter 10 End of Chapter Material in your eText.
2. Answer the four questions.

3. Financial Statement Analysis Case

   Johnson & Johnson

   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                             37,133

         Less accumulated depreciation                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                                                                   (34,913)

                           Sales of investments                                                                           24,119 

                           Other (primarily intangibles)                                                                 (299)

                 Net cash used by investing activities                                                         (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       1,782 

                  Net cash used by financing activities                                                         (12,260)

                 Effect of exchange rate changes on cash and cash equivalents                   (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                                                                                                 $603 

                              Income taxes                                                                                       3,536 

Instructions

(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.