1. What are the definition and purpose of an income statement, as shown in case Exhibit 1? What are the definition and purpose of a balance sheet as shown in case Exhibit 2? How are the two statements related? Are Krispy Kreme’s financial statements exact? Does management have any discretion over how those accounts are estimated?

2. Is Krispy Kreme financially “healthy”? What do the statements show? What do the ratios show? 

3. Given your assessment of Krispy Kreme’s health, why did its stock price drop by 80% between 2003 and 2004?

This case considers the sudden and very large drop in the market value of equity for Krispy Kreme Doughnuts, Inc., associated with a series of announcements made in 2004. Those announcements caused investors to revise their expectations about the future growth of Krispy Kreme, which had been one of the most rapidly growing American corporations in the new millennium. The task for the student is to evaluate the implications of those announcements and to assess the financial health of the company. This case is intended to be introductory as it can provide a first exercise in financial statement analysis and lay the foundation for two important financial themes: the concept of financial health, and the financial-economic definition of value and its determinants.

Exhibit 1