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Johnson & Johnson, the world's leading and most diversified healthcare corporation serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.

1.       Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

                                                     Building and building equipment                               20-40 years

                                                     Land and leasehold improvements                            10-20 years

                                                     Machinery and equipment                                          2-13 years

4. Property, Plant and Equipment

At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were:

  (dollars in millions)      2014       2013

                                Land and land improvements                      $ 833                         $  885

                                Buildings and building equipment                10,046                       10,423

                               Machinery and equipment                            22,206                       22,527

                                Construction in progress                             3,6003,298

36,685                       37,133

                             Less accumulated depreciation                       20,55920,423 $ 16,12616,710

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was $115 million, $105 million and $115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was $2.5 billion, $2.7 billion and $2.5 billion, respectively.

Johnson & Johnson provided the following selected information in its 2014 cash flow statement

Johnson & Johnson

2014 Annual Report

                                                        Consolidated Financial Statements (excerpts)

Net cash flows from operating activities                                                                                                                  $18,471

Cash flows from investing activities

         Additions to property, plant and equipment                                                                                                     (3,714)

         Proceeds from the disposal of assets                                                                                                                    4,631

         Acquisitions, net of cash acquired                                                                                                                        (2,129)

       Purchases of investments                                                                                                                                   (34,913)

       Sales of investments                                                                                                                                              24,119

       Other (primarily intangibles)                                                                                                                                    (299)    

Net cash used by investing activities                                                                                                                        (12,305)

Cash flows from financing activities

        Dividends to shareholders                                                                                                                                    (7,768)

        Repurchase of common stock                                                                                                                              (7,124)

        Proceeds from short-term debt                                                                                                                             1,863

        Retirement of short-term debt                                                                                                                            (1,267)

        Proceeds from long-term debt                                                                                                                              2,098

        Retirement of long-term debt                                                                                                                              (1,844)

        Proceeds from the exercise of stock options/excess tax benefits                                                                   1,782

Net cash used by financing activities                                                                                                                          (12,260)

Effect of exchange rate changes on cash and cash equivalents                                                                                  (310)

Increase in cash and cash equivalents                                                                                                                          (6,404)

Cash and cash equivalents, beginning of year (Note 1)                                                                                            20,927

Cash and cash equivalents, end of year (Note 1)                                                                                                       14,523

Supplemental cash flow data

Cash paid during the year for:

       Interest                                                                                                                                                                          $ 603

       Income taxes                                                                                                                                                                  3,536

Overview:

Property, plant, and equipment posses certain characteristics that distinguish them from other assets owned by a business enterprise. In this project case, you will demonstrate how depreciation affects corporate financial statements.

Instructions:

1.) Review the information provided for Johnson & Johnson in the Financial Statement Analysis Case located in Chapter 10 (see attached for statements)

2.) Answer the four questions

a.) What was the cost of buildings and building equipment at the end of 2014?

b.) Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?

c.) What was the actual interest paid by the company in 2014?

d.) What is Johnson & Johnson's free cash flow? From the information provided, comment on Johnson & Johnson's financial flexibility.

Accounting Basics, Accounting

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