Krispy Kreme Doughnuts, Inc.

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Krispy Kreme Doughnuts, Inc.

Depreciation Analysis:

The company is adhering to SFAS 142 in accounting for its Intangible Assets. In this, intangible assets that are identified with a limited life are no longer liquidated but are subject to an impairment test. Using the straight-line method in depreciation is how property and equipment is calculated. The straight-line depreciation method divides the cost by the life of the asset which is why I believe this method to be reasonable. Since assets are resources that a business uses to generate revenues then this depreciation method best matches expenses with revenues.

“Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives: Buildings— 15 to 35 years; Machinery and equipment—3 to 15 years; Leasehold improvements— lesser of useful lives of assets or lease term.” (Larson, Wild, and Chiappeta)

“In July 2001, the FASB issued SFAS No. 142….Goodwill and some intangible assets will no longer be amortized, but will be reviewed at least annually for impairment…the provisions of SFAS No. 142 may result in more volatility in reported income as impairment losses may occur irregularly and in varying amounts.”

Company Stock Analysis:

Krispy Kreme’s balance sheet shows that 10,000 shares of preferred stock has been authorized, but none has been issued. The number of Common Stock Shares Outstanding have increased from 54,271 (thousand) in 2002 to 56,295 (thousand) in 2003, with no Treasury Stock reported. Krispy Kreme has not made any dividend payments since 2001, this resulted in a Dividend Yield of 0% for both years. This; however, would not be considered a weakness, but rather an indication of Krispy Kreme’s stock being a “Growth Stock”, which is evidenced by the growth in company’s assets. The increase in Earnings per share from $0.49 in 2002 to $0.61 in 2003 is but another evidence of the growth potential of the company.

“We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future……Dividend Payments are restricted by our bank credit facilities to 50% of our net income for the immediately preceding fiscal year.”

Cash Flow Statement Analysis:

Krispy Kreme uses the Indirect Method of reporting Operating Cash Flows. The company did not pay any cash dividends in 2002 and 2003, while in 2001 the cash provided by operating activities was $32,112 (Thousand), while the Cash dividends was $7,005 (Thousand); which means that the 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 is the tax benefit from the exercise of nonqualified stock options of $13,795 (thousand). In 2003, the largest amount in investing activities is the cash outflow of $83,196 for additions to property and equipment, while in 2002, the largest amount in investing activities is the $37,310 cash outflow for additions to property and equipment. In 2003, the largest amount in financing activities is the $2,170 cash outflow for repayment of long-term debt; while in the 2002, the largest amount in financing activities is the cash inflow of $17,202 which is the proceeds from sale of stock. The increase in the cash flow provided by operating activities from $36,210 in 2002 to $51,036 in 2003 is an indication of the improvement in liquidity during the same period.

“We funded our capital requirements for fiscal 2000, 2001, and 2002 primarily through cash flow generated from operations….Over the past three years, we...
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