Question

Hershey Company is one of the world’s leading producers of chocolates, candies, and confections. The company sells chocolates and candies, mints and gums, baking ingredients, toppings, and beverages. Hershey’s consolidated balance sheets for 2009 and 2010 follow: 2009 2010

Hershey: Consolidated Balance Sheets (millions)	2009	2010
Assets
Current Assets
Cash and Equivalents	$   253.6	$   884.6
Accounts Receivable, Trade	410.4	390.1
Inventories	519.7	533.6
Deferred Income Taxes	39.9	55.8
Prepaid Expenses and Other Assets	161.8	141.1
Total Current Assets	1,385.4	2,005.2
Property, Plant, and Equipment, net	1,404.8	1,437.7
Goodwill and Intangible Assets	571.6	524.1
Other Intangible Assets	125.5	123.1
Deferred Income Taxes and Other Assets	187.7	182.6
Total Assets	$ 3,675.0	$ 4,272.7
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable	$   287.9	$   410.7
Accrued Liabilities and Taxes	583.4	602.7
Short-Term Debt	24.1	24.1
Current Portion of Long-Term Debt	15.2	261.4
Total Current Liabilities	910.6	1,298.9
Long-Term Debt	1,502.7	1,541.8
Other Long-Term Liabilities	501.4	494.4
Total Liabilities	2,914.7	3,335.1
Shareholders’ Equity
Common Stock	359.9	359.9
Additional Paid-In Capital	394.7	434.9
Retained Earnings	4,148.3	4,374.7
Treasury Stock	(3,979.6)	(4,052.1)
Accumulated Other Comprehensive Loss	(202.9)	(215.1)
Noncontrolling Interests	39.9	35.3
Total Shareholders’ Equity	760.3	937.6
Total Liabilities and Shareholders’ Equity	$ 3,675.0	$ 4,272.7

Additional information for 2010:

Total sales $5,671.0

Costs of goods sold $3,255.8

Net income $ 509.8 2.

Compute the following ratios for 2010. Provide a brief description of what each ratio reveals about Hershey.

e. Quick f. Inventory turnover days

g. Accounts receivable turnover days

h. Accounts payable turnover days

i. Operating cycle (in days)

j. Total asset turnover

Answer 1

e) Quick f. Inventory turnover days =  

(Average inventory ÷ cost of goods sold) x 365

Average inventory = 519.7 + 533.6 / 2

= $526.65

Inventory turnover days for 2010 = 526.65 / $3,255.8 * 365

= 59 days

Inventory turnover shows how many times a company has sold and replaced inventory during a given period.A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.

g. Accounts receivable turnover ratio =  Net credit sales / Avg account receivable

= $5,671.0 / 400.25

= 14.16

* Avg account receivable = 410.4 + 390.1 / 2

= 400.25

( we assume that all sales are credit sales)

Accounts receivable turnover days = 365 days / Accounts receivable turnover ratio

= 365 days / 14.16

= 26 days (approx)

(The accounts receivable turnover ratio measures a company's effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or being paid)

h. Accounts payable turnover ratio = purchase / average account payable

* Cost of gooods sold = purchases + opening stock - closing stock

  $3,255.8 = purchases + 519.7 - 533.6

* Purchases for 2010 = $ 3270

*  average account payable = $287.9 + 410.7 / 2

= $349.3  

Accounts payable turnover ratio = 3270 / 349.3

= 9.36
Accounts payable turnover days = 365 days / 9.36

= 39 days

(The accounts payable turnover ratio indicates to creditors the short-term liquidity and, to that extent, the creditworthiness of the company. A high ratio indicates prompt payment is being made to suppliers for purchases on credit.)

i) Operating cycle = [ 365 / purchases * average inventory ] + [ 365 / receivable * avg account receivable]

= [ 365 / 3270 * 526.65] + [ 365 /390.1 * 400.25]

= $433.29

j. Total asset turnover = Net sales / total assets

= $5,671.0 / 4272.7

= 1.33

The total asset turnover ratio compares the sales of a company to its asset base.