Monsanto: Corporate Annual Review of Financial Statements Essay Example
In the corporate annual report, a statement reporting the independent auditor’s opinion was included. This opinion shows that the auditor has reviewed the internal controls over financial reporting and it also audits the consolidated financial position of Monsanto. The auditors express the fact that they are independent from Monsanto which means that the report is not coming from someone within the Monsanto Company. This is also important because it means that the report will not be biased and hopefully would also not be fraudulent.The report is important in those respects because it shows the shareholders that they are not investing in a company that will eventually fold because they are reporting inaccurate income.
The report tells the shareholders that “effective internal control over financial reporting… is fairly stated, in all material respects, based on the...
criteria established in Internal Control—Integrated Framework” (Foster 56). The report also states that the “consolidated financial statements [are] presented fairly, in all material respects” (Foster 57).This is a good thing for the shareholders because it shows them that the opinions expressed are an unqualified opinion. This means that the statements are in compliance with GAAP. Before understanding the charts presented in the corporate annual report, the shareholder needs to have an understanding of what the basics are and what is presented on these charts.
Shareholders also need to understand how these numbers are computed and they might also want to see how the company has done over the past few years. There are many different components and factors that go into just one chart.The most basic of components and one of the most valuable to a company is an asset
An asset is an economic resource that is expected to be of benefit in the future. Assets are split up into two different ways that they can be claimed on. The first is a liability.
A liability is an economic obligation or debt payable to an individual or an organization outside of business. Liabilities would include such things as notes payable, accounts payable, and salary payable. The next way is the owner’s equity. Owner’s equity is the owner’s claims to the assets of the business.The owner’s equity is the reason why businesses get started in the first place. The owner wants to increase his equity and so all the ways to increase the equity are divided up and put on the left side of the t-charts.
On the right side are the decreases of the owner’s equity. There are many ways either decreases or increases can occur on the t-chart. The main increase addressed in the balance sheets is the revenues or the net sales. The net sales are considered to be all of the sales made after decreasing any sales returns, discounts, and allowances.
These sales are then all computed to come up with the net sales which will then be subtracted by the cost of goods sold. The cost of goods sold is the net cost that the product or service provided to the customer cost the company to produce for this customer. This cost is subtracted from the net sales to come up with the gross profit. The gross profit shows the shareholders just how much profit was made before factoring in any expenses, liabilities, bad-debt, or anything that would decrease the profit
after the sale has been made.An expense is the decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers.
After all of that has been computed, the total operating expenses are subtracted from the gross profit to come up with the income from operations. This shows the shareholders what the profit looks like after factoring in the operating expenses, but it does not show the net income quite yet. Other factors to include are the interest expenses and interest income and the discontinued operations that would create a loss. All of these numbers factor into coming up with the net income.This is the excess of total revenue over total expenses, which means that all of the revenues were added up and all of the expenses were added up and the expenses were then subtracted from the revenues.
This would produce one of two things. It would either produce a net profit or a net loss. The net profit would be if the company has produced profitable income over the past year. A net loss would be if the company has lost more than it has made. This means that the expenses were in excess to the revenues made.
There are five statements in the Monsanto corporate annual review.These statements include the statements of consolidated operations, the statements of consolidated financial position, the statements of consolidated cash flows, the statements of consolidated shareowners’ equity, and the statements of consolidated comprehensive income. There will only be four of them discussed in this section because the four are the only ones relevant to individual statements needed
to assess the company’s financial situation as a shareholder. The first statement, the statement of consolidated operations is the main statement needed to show the company’s yearly income.This statement also shows the basic earnings or losses per share, which would be extremely helpful to shareholders.
The important thing about this statement is that it shows the shareholder the past three years worth of earnings or losses. This might be important to someone wanting to invest some money in a company. The statement starts off with net sales already computed. Everything in is the millions except for the share amounts at the bottom of the sheet.
The net sales are 7,344 dollars. This is then used to come up with the gross profit.The gross profit is, as mentioned earlier, the cost of goods sold subtracted from the net sales. The cost of goods sold is 3,796 dollars.
This gives the gross profit a 3,548 dollar amount. After subtracting the operating expenses from this, the total operating expenses come out to be 2,371 dollars. After further subtraction of income from operations due to interest expenses and other expenses and the subtraction of income tax and minority interest expense, the income from continuing operations comes out to be 698 dollars. A few other items are used to subtract 9 more dollars, which leaves the sheet with the net income of 689 dollars.This is a large amount of income and compared to the last two years is nearly double those years combined. If an investor would like to start investing in this company but is unsure, this statement alone provides much assurance of growth.
On top of that, the
net income per share has also gone up from the last year almost three times its value. The next statement shown is the consolidated financial position. This statement is the balance sheet for the past two years. It shows the assets on one side and the liabilities and shareholder’s equity on the other.A balance sheet is defined as the entity’s assets, liabilities, and owner’s equity as of a specific date. The specific date in this balance sheet is August 31st 2006 and 2005.
The reason for this is purely based on the main product Monsanto deals with. This product is seed. The seed season begins in September and the harvesting season ends in September for most growers. That is why the fiscal year ends at the end of August because of the life of the crop and the crop cycle that starts in September. The assets in the company are all added up in millions and total out to be 11,728 dollars for 2006 and 10,579 dollars for 2005.
The liabilities and shareholder’s equity are also all computed and come out to the same totals for both years. This shows that the statement is balanced on both sides of the balance sheet. This is normal for any balance sheet to come out this way. The next financial statement is the cash flow statement. This statement is divided up into four sections.
These sections are the net income, the operating activities, the investing activities, and the financing activities. The net income shown on this statement is taken from the first financial statement. It is, in millions, 689 dollars.The operating activities take the net income and add or
subtract it to the adjustments to reconcile net income to net cash. This will give us the net cash provided by operating activities.
This will take us to the investing activities which will be added or subtracted to come up with the net cash required by investing activities. These activities are investments that could be short or long term and acquisitions of businesses. The one item in the Monsanto statement that is a big item is the technology. They invest hundreds of millions of dollars in technology and that is put into this area on the statement.
The next item is the cash flows provided by financing activities. This will show the debt proceeds and reductions and any other purchases that would lead to notes payable. It also shows payment of dividends at the end. Added or subtracted it would give you the net cash required by financing activities. This would then be effected by the exchange rate changes on cash and cash equivalents.
Then it would be effected by the net increase of decrease in cash. The next thing this sheet shows is last year’s cash and cash equivalents so they can be added to come up with the cash and cash equivalents at the end of the period.The neat thing about the Monsanto corporate annual report is that it goes back to 2004 to show the cash flows and compare them to today. In order to understand the inventory method used, one must learn about how Monsanto operates.
Monsanto has two segments to the company. The first is the seed and genomics. This segment produces leading seed brands including Dekalb, Asgrow, and Bollgard. With
these seed companies, Monsanto develops traits that are resistant to herbicides that control insects and weeds.
These herbicides are manufactured by a subsidiary company, Roundup. Roundup also deals with domestic herbicides for lawn and gardens.This segment also deals with animal agricultural products focused on improving dairy cow productivity and swine genetics (Begemann 1). The other segment of Monsanto is the agricultural productivity. This segment deals with the farmers’ ability to achieve successful harvest year after year. There is a program Monsanto put in place to assure that the quality of the crops will be what they expect year after year.
It also gives the growers comfort in knowing that the product that is put out on the market is a quality assured product and that Monsanto technicians and scientists are doing all they can to make the product work properly.The way this program is set up starts with a money back guarantee. Monsanto pledges that all of the products they put out on the market will work and if they do not, they will pay the farmers for their crop loss. There are some stipulations to this guarantee, however. The products that are covered by this are only Monsanto traited acres. If a farmer decides that he wants to use a competitive product, Monsanto will not penalize this person if it is the competitive seed that the grower decides to use.
Problems arise when a grower decides to use a competitive glyphosate on all of his acres. This means that the grower will spray this on all of his acres. If he does that, he disqualifies himself for the program. If he buys a competitive seed
that has a Monsanto trait that is okay because Monsanto will still make the trait fee for this seed. How does all of this matter when dealing with Monsanto’s financial statements? Monsanto makes a large sum of money on research.
This research is sold to many different companies across the United States and the world.The research is sold for millions of dollars at a time to hundreds of companies. These traits continue to make Monsanto money also. When one of these companies sells seed to a customer, Monsanto will make a trait fee for that seed. This fee is anywhere from one United States dollar a bag to seventy-five United States dollars a bag (Paris 1).
When a Monsanto traited product fails, Monsanto simply pays the trait fee back if it is a Monsanto trait that another company purchased. The seed company will most often pay the rest of the money back to the customer.Monsanto has succeeded so much in the recent years because they are losing nothing when these traits fail. If the product succeeds, they gain the trait fee. The only thing that they might lose if the product fails is the customer, and in most businesses, that is unavoidable. Monsanto also, because they have Dekalb, Asgrow, Bollgard, and many other seed companies, developed Roundup Rewards to help assure that these seeds will work properly.
Because of the demands on more technology and better hybrids combined with the perishable product such as seed, Monsanto practices the LIFO method (Horngren 66).This method is the last product in is the first one out because of the demand on technology with the products. The opposite is
true for overseas business. Monsanto has to use the FIFO method for doing business in other countries. The reason it is not a LIFO method is because farmers can purchase any technology they want to and the product is perishable.
They can purchase conventional corn, or they can purchase Roundup Ready corn. The choice is theirs’ to be made. It is also not a LIFO method overseas because Monsanto cannot keep up with the soaring demands that new technology has put on the corn.The seed produced goes out faster than Monsanto can replenish it so when they do replenish some of the inventory, it goes out immediately here so that the farmers can get the most recent technology.
Depreciation is also an important aspect to this report. Monsanto uses a straight line basis of depreciation over the estimated useful life of the asset. A straight line depreciation method is one that allocates an equal amount of depreciation to each year that the asset is considered useful. An accelerated depreciation method can be one of two separate methods. It can either be units of production method or double declining balance method.
UOP method is a method that allocates a fixed amount of depreciation to each unit of output. This means that it has a specific dollar amount for the units allocated, which could be miles for a car. The double declining method multiplies decreasing book value by a percentage that is two times the straight line method. This means that the book value will reach the residual value much faster than the other methods.
Units of production method and double declining balance method will minimize income taxes.
The method used by Monsanto, the straight line method will maximize reported income.This is why each of these is useful, but Monsanto most likely would like to look better on Wall Street than have to pay less income tax because of depreciation methods. This is probably why they have chosen to use the straight line method. Works Cited Begemann, B. "Seeds and Traits.
" (2007): 19 Oct. 2007 www. monsanto. com Foster, S.
L. Monsanto Company 10-K Form. 2006. Hirst, E, and McAnally, M. Cases in Financial Reporting. Vol.
5. Prentice-Hall, 2006. Horngren, C. , and Harrison, W. Accounting. 7 ed.
New Jersey: Pearson Education, Inc, 2007. Paris, K. "Programs and Financing. " Asgrow and DEKALB 19 Oct. 2007 www. asgrowanddekalb.
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