Refer to P&G's financial statements and the accompanying notes to answer the following

questions. (a) What alternative formats could P&G have adopted for its balance sheet?
Which format did it adopt? (b) Identify the various techniques of disclosure P&G might
have used to disclose additional pertinent financial information. Which technique does it
use in its financials? (c) In what classifications are P&G's investments reported? What
valuation basis does P&G use to report its investments? How much working capital did
P&G have on June 30, 2007? On June 30, 2006? (d) What were P&G's cash flows from
its operating, investing, and financing activities for 2007? What were its trends in net
cash provided by operating activities over the period 2005 to 2007? Explain why the
change in accounts payable and in accrued and other liabilities is added to net income to
arrive at net cash provided by operating activities. (e) Compute P&G's (1) current cash
debt coverage ratio, (2) cash debt coverage ratio, and (3) free cash flow for 2007. What
do these ratios indicate about P&G's financial condition?

(a)

P&G could use the account form or report form. P&G uses the account form.

(b)

The techniques of disclosing pertinent information include (1) parenthetical

explanations, (2) notes, (3) cross-reference and contra items, and (4)
supporting schedules. P&G uses parenthetical explanations and notes (see
notes to financial statements section) and supporting schedules.

(c)

Investments are reported on P&Gs balance sheet as current assets. Note 1

(Significant Accounting Policies) states that Investments are readily available
marketable debt and equity securities. These securities are reported at fair
value. Unrealized gains and losses on trading securities are recognized in
income. Unrealized gains and losses relating to investments classified as
available-for-sale are recorded as a component of accumulated other
comprehensive income in stockholders equity. As of June 30, 2007, P&G had
negative working capital (current assets less than current liabilities) of
$6,686,000,000. At June 30, 2006, P&Gs positive working capital was
$4,344,000,000.

(d)

The following table summarizes P&Gs cash flows from operating, investing,
and
financing
activities
in
the
20052007
time
period
(in millions).

Net cash provided by operating activities

2007

2006

2005

$ 13,435

$11,375

$ 8,679

Net cash used in investing activities

(2,483)

(730)

(2,336)

Net cash used in financing activities

(12,478)

(10,578)

(4,125)

P&Gs net cash provided by operating activities increased by 31% from 2005 to 2006,
and by 18% from 2006 to 2007. When accounts payable, accrued and other liabilities
increase, cost of goods sold and operating expenses are higher on an accrued basis than
they are on a cash basis. To convert to net cash provided by operating activities, the
increase in accounts payable, accrued and other liabilities must be added to net income.
(e)

1.

Net Cash Provided by Operating Activities Average Current

Liabilities = Current Cash Debt Ratio
$13,435

2.

= 0.53:1

Net Cash Provided by Operating Activities Average Total Liabilities

= Cash Debt Coverage Ratio
$13,435

3.

($30,717 + $19,985)

($71,254 + $72,787)
2

= 0.19:1

Net cash provided by operating activities less capital expenditures and

dividends
Net cash provided by operating activities...............................
Less: Capital expenditures.......................................................
Dividends.....................................................................
Free cash flow............................................................................

$13,435
$2,945
4,209

Note that P&G also used cash ($5,578 million) to repurchase common
stock, which reduces its free cash flow to $703 million. P&Gs financial
position appears adequate. Over 18% of its total liabilities can be
covered by the current years operating cash flow and its free cash flow
position indicates it is easily meeting its capital investment and
financing demands from current free cash flow.

7,154
$ 6,281