Financial Health of Krispy Kreme

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Krispy Kreme

Financial Health Analysis

ACC 226

Depreciation Analysis:
Depreciation is the term used for the decline of an object value over time. Krispy Kreme’s depreciation is calculated using the straight line method. Benefits from asset are more likely to be constant over its live, thus making straight line method of depreciation more appropriate as it results in a constant annual depreciation change. Krispy Kreme uses SFAS-142 for accounting of intangible assets. Per this method intangible assets identified with an indefinite life are not amortized and now are subject to an impairment test. Use of SFAS-142 results in more volatility in reported income as impairment losses may occur irregularly and in varying amounts. A possible explanation for the difference is amounts is that Krispy Kreme may have acquired plant assets for a note to pay later, another possible explanation is Krispy Kreme disposed of some plant assets at a loss during the year. Company Stock Analysis:

The No of common shares outstanding increased from 54,271 thousand to 56,295 thousand in 2003, a rise of 3.73%. For 2003, the weighted average common shares used were 55,093 and for 2002 were 53,703. For both years the shares outstanding at year-end were slightly higher than the average shares outstanding during the year. As of February 3, 2003 Krispy Kreme did not hold any treasury stock. Krispy Kreme also has no preferred stock or outstanding. No cash dividends were paid to common stockholder’s for fiscal years 2003 and 2002. This indicates that Krispy Kreme’s stock is a “Growth Stock” and explains why it has not paid any dividends. Krispy Kremes basic earnings per common share figure have consistently grown over this 3 year period. The 2003 amount is considerably larger than the prior years. This could have improved more if not for the higher than proportional increase in depreciation and the amortization for the arbitration award in 2003. In the years 2002 and 2003 Krispy Kreme did not report any changes in accounting principals nor had any occurrence of extraordinary items for fiscal years 2002 or 2003. There are also no gains or losses on disposal of business segment for fiscal years 2002 or 2003. Cash Flow Statement Analysis:

Krispy Kreme used the indirect method of reporting operating cash flows. Krispy Kreme did not pay dividends in 2002 and 2003. In 2001 the cash provided by operating activities was $32,112 (thousand), while the cash dividends were $7,005 (thousand). Cash provided by operating activities exceeded the cash paid for dividends. In 2001, the largest item in reconciling the difference between net income and cash flow from operations is the increase in accrued expenses of $7,966 (thousand), while in 2002 the largest item in reconciling the difference between net income and cash flow from operations is the $13,317 increase in receivables; and finally in 2003, the largest item in reconciling the difference between net income and cash flow from operations was the tax benefit from the exercise of nonqualified stock options of $13,795,000. In 2002, the largest amount in investing activities is $37,310 (thousand) for additions to property and equipment. In 2003, the largest amount in investing activities is $83,196 also for additions to property and equipment. The cash outflow in investing has increased in 2003 In 2002, the largest amount in financing activities is the cash inflow of $17,202 (thousand) which are the proceeds from sales of stock. While is 2003, the largest amount in financing activities is the $2170 (thousand) cash outflow for repayment of long term debt. Liquidity has improved from 2002 to 2003 which is evident from the fact that the increase in the cash flow provided by operating activities has increased from $36, 210 (thousand) in 2002 to $51,036 (thousand) in 2003. Krispy Kreme is funding capital requirements primarily through cash flow generated...
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