Financial Reporting Problem: The Procter & Gamble Company (P&G). The financial statements of P&G are presented below. The company's complete annual report, including the notes to the financial statements, is available online.

Refer to P&G's financial statements and the accompanying notes to answer the following questions.

a. What investments does P&G report in 2020, and describe how these investments are accounted for in its financial statements?

b. How are P&G's investments valued? How does P&G determine fair value?

c. How does P&G use derivative financial instruments?

Specimen Financial Statements: The Procter & Gamble Company Once each year, a corporation communicates to its stockholders and other interested parties by issuing a complete set of audited financial statements. The annual report, as this communication is called, summarizes the financial results of the company's operations for the year and its plans for the future. Many annual reports are attractive, multicolored, glossy public relations pieces, containing pictures of corporate officers and directors as well as photos and descriptions of new products and new buildings. Yet the basic function of every annual report is to report financial information, almost all of which is a product of the corporation's accounting system. The content and organization of corporate annual reports have become fairly standardized. Excluding the public relations part of the report (pictures, products, etc.), the following are the traditional financial portions of the annual report: Financial Highlights Letter to the Stockholders Management's Discussion and Analysis Financial Statements Notes to the Financial Statements Management's Responsibility for Financial Reporting Management's Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Selected Financial Data The official SEC filing of the annual report is called a Form 10-K, which often omits the public relations pieces found in most standard annual reports. On the following pages, we present The Procter & Gamble Company (P&G)'s financial statements taken from the company's 2020 Form 10-K. The complete report, including the notes to the financial statements, is available at the company's website. Appendix B bappB.indd 1 28/02/22 7:42 PM B-2 APPENDIX B Specimen Financial Statements: The Procter & Gamble Company Consolidated Statements of Earnings Amounts in millions except per share amounts; Years ended June 30 2020 2019 2018 NET SALES $70,950 $67,684 $66,832 Cost of products sold 35,250 34,768 34,432 Selling, general and administrative expense 19,994 19,084 19,037 Goodwill and indefinite-lived intangibles impairment charges 8,345 OPERATING INCOME 15,706 5,487 13,363 Interest expense (465) (509) (506) Interest income 155 220 247 Other non-operating income, net 438 871 222 EARNINGS BEFORE INCOME TAXES 15,834 6,069 13,326 Income taxes 2,731 2,103 3,465 NET EARNINGS 13,103 3,966 9,861 Less: Net earnings attributable to noncontrolling interests 76 69 111 NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE1 $13,027 $ 3,897 $ 9,750 NET EARNINGS PER COMMON SHARE:2 Basic $ 5.13 $ 1.45 $ 3.75 Diluted $ 4.96 $ 1.43 $ 3.67 1 Net earnings attributable to Procter & Gamble in fiscal 2019 was negatively impacted by the impairment charges of $8.3 billion related to Shave Care goodwill and Gillette indefinite-lived intangible assets. 2 Basic net earnings per common share and Diluted net earnings per common share are calculated on Net earnings attributable to Procter & Gamble. Consolidated Statements of Comprehensive Income Amounts in millions; Years ended June 30 2020 2019 2018 NET EARNINGS $13,103 $3,966 $9,861 OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX Foreign currency translation (net of $59, $78 and $(279) tax, respectively) (1,083) (213) (305) Unrealized gains/(losses) on investment securities (net of $(1), $0 and $0 tax, respectively) (12) 184 (148) Unrealized gains/(losses) on defined benefit retirement plans (net of $(42), $22 and $68 tax, respectively) (150) 169 334 TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX (1,245) 140 (119) TOTAL COMPREHENSIVE INCOME 11,858 4,106 9,742 Less: Total comprehensive income attributable to noncontrolling interests 60 70 109 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE $11,798 $4,036 $9,633 bappB.indd 2 28/02/22 7:42 PM Specimen Financial Statements: The Procter & Gamble Company B-3 Consolidated Balance Sheets Amounts in millions except stated values; As of June 30 2020 2019 Assets CURRENT ASSETS Cash and cash equivalents $ 16,181 $4,239 Available-for-sale investment securities 6,048 Accounts receivable 4,178 4,951 INVENTORIES Materials and supplies 1,414 1,289 Work in process 674 612 Finished goods 3,410 3,116 Total inventories 5,498 5,017 Prepaid expenses and other current assets 2,130 2,218 TOTAL CURRENT ASSETS 27,987 22,473 PROPERTY, PLANT AND EQUIPMENT, NET 20,692 21,271 GOODWILL 39,901 40,273 TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET 23,792 24,215 OTHER NONCURRENT ASSETS 8,328 6,863 TOTAL ASSETS $120,700 $115,095 Liabilities and Shareholders' Equity CURRENT LIABILITIES Accounts payable $ 12,071 $ 11,260 Accrued and other liabilities 9,722 9,054 Debt due within one year 11,183 9,697 TOTAL CURRENT LIABILITIES 32,976 30,011 LONG-TERM DEBT 23,537 20,395 DEFERRED INCOME TAXES 6,199 6,899 OTHER NONCURRENT LIABILITIES 11,110 10,211 TOTAL LIABILITIES 73,822 67,516 SHAREHOLDERS' EQUITY Convertible Class A preferred stock, stated value $1 per share (600 shares authorized) 897 928 Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized) Common stock, stated value $1 per share (10,000 shares authorized; shares issued: 2020 - 4,009.2, 2019 - 4,009.2) 4,009 4,009 Additional paid-in capital 64,194 63,827 Reserve for ESOP debt retirement (1,080) (1,146) Accumulated other comprehensive income/(loss) (16,165) (14,936) Treasury stock, at cost (shares held: 2020 1,529.5, 2019 1,504.5) (105,573) (100,406) Retained earnings 100,239 94,918 Noncontrolling interest 357 385 TOTAL SHAREHOLDERS' EQUITY 46,878 47,579 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $120,700 $115,095 bappB.indd 3 28/02/22 7:42 PM B-4 APPENDIX B Specimen Financial Statements: The Procter & Gamble Company Consolidated Statements of Shareholders' Equity Dollars in millions except per share amounts; shares in thousands Preferred Stock Additional Paid-In Capital Reserve for ESOP Debt Retirement Accumulated Other Comprehensive Income/ (Loss) Treasury Stock Retained Earnings Noncontrolling Interest Total Shareholders' Equity Common Stock Shares Amount BALANCE JUNE 30, 2017 2,553,297 $4,009 $1,006 $63,641 ($1,249) ($14,632) ($93,715) $96,124 $594 $55,778 Net earnings 9,750 111 9,861 Other comprehensive income/(loss) (117) (2) (119) Dividends and dividend equivalents ($2.7860 per share): Common (7,057) (7,057) Preferred, net of tax benefits (265) (265) Treasury stock purchases (81,439) (7,004) (7,004) Employee stock plans 21,655 199 1,469 1,668 Preferred stock conversions 4,580 (39) 6 33 ESOP debt impacts 45 89 134 Noncontrolling interest, net (113) (113) BALANCE JUNE 30, 2018 2,498,093 $4,009 $967 $63,846 ($1,204) ($14,749) ($99,217) $98,641 $590 $52,883 Impact of adoption of new accounting standards (326) (200) (27) (553) Net earnings 3,897 69 3,966 Other comprehensive income/(loss) 139 1 140 Dividends and dividend equivalents ($2.8975 per share): Common (7,256) (7,256) Preferred, net of tax benefits (263) (263) Treasury stock purchases (53,714) (5,003) (5,003) Employee stock plans 55,734 93 3,781 3,874 Preferred stock conversions 4,638 (39) 6 33 ESOP debt impacts 58 99 157 Noncontrolling interest, net (118) (248) (366) BALANCE JUNE 30, 2019 2,504,751 $4,009 $928 $63,827 ($1,146) ($14,936) ($100,406) $94,918 $385 $47,579 Net earnings 13,027 76 13,103 Other comprehensive income/(loss) (1,229) (16) (1,245) Dividends and dividend equivalents ($3.0284 per share): Common (7,551) (7,551) Preferred, net of tax benefits (263) (263) Treasury stock purchases (61,346) (7,405) (7,405) Employee stock plans 32,603 362 2,212 2,574 Preferred stock conversions 3,738 (31) 5 26 ESOP debt impacts 66 108 174 Noncontrolling interest, net (88) (88) BALANCE JUNE 30, 2020 2,479,746 $4,009 $897 $64,194 ($1,080) ($16,165) ($105,573) $100,239 $357 $46,878 bappB.indd 4 28/02/22 7:42 PM Specimen Financial Statements: The Procter & Gamble Company B-5 Consolidated Statements of Cash Flows Amounts in millions; Years ended June 30 2020 2019 2018 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR $ 4,239 $2,569 $5,569 OPERATING ACTIVITIES Net earnings 13,103 3,966 9,861 Depreciation and amortization 3,013 2,824 2,834 Loss on early extinguishment of debt 346 Share-based compensation expense 558 515 395 Deferred income taxes (596) (411) (1,844) Loss/(gain) on sale of assets 7 (678) (176) Goodwill and indefinite-lived intangible impairment charges 8,345 Change in accounts receivable 634 (276) (177) Change in inventories (637) (239) (188) Change in accounts payable, accrued and other liabilities 1,923 1,856 1,385 Change in other operating assets and liabilities (710) (973) 2,000 Other 108 313 431 TOTAL OPERATING ACTIVITIES 17,403 15,242 14,867 INVESTING ACTIVITIES Capital expenditures (3,073) (3,347) (3,717) Proceeds from asset sales 30 394 269 Acquisitions, net of cash acquired (58) (3,945) (109) Purchases of short-term investments (158) (3,909) Proceeds from sales and maturities of investment securities 6,151 3,628 3,928 Change in other investments (5) (62) 27 TOTAL INVESTING ACTIVITIES 3,045 (3,490) (3,511) FINANCING ACTIVITIES Dividends to shareholders (7,789) (7,498) (7,310) Increases/(reductions) in short-term debt 2,345 (2,215) (3,437) Additions to long-term debt 4,951 2,367 5,072 Reductions of long-term debt1 (2,447) (969) (2,873) Treasury stock purchases (7,405) (5,003) (7,004) Impact of stock options and other 1,978 3,324 1,177 TOTAL FINANCING ACTIVITIES (8,367) (9,994) (14,375) EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH (139) (88) 19 CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 11,942 1,670 (3,000) CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR $16,181 $4,239 $ 2,569 SUPPLEMENTAL DISCLOSURE Cash payments for interest $ 434 $497 $529 Cash payment for income taxes 3,550 3,064 2,830 Assets acquired through non-cash finance leases are immaterial for all periods. 1 Includes early extinguishment of debt costs of $346 in 2018