11. Under current U.S. GAAP, Johnson & Johnson includes on its balance sheet the net funded status of its retirement plans. Consider the balance sheet effects of instead including the gross assets of both the retirement plans and the other benefit plans and their respective gross obligations.
    1. Use the table below to show how total assets and total liabilities on the balance sheet would be affected.

	Gross amount that would be added	Net amount currently included	Net amount that would be added
Retirement and other benefit plan assets
Retirement and other benefit plan liabilities

2. Determine the amounts and ratios below using Johnson & Johnson's reported numbers. Then, recompute the amounts and ratios on a pro forma basis taking into account the restated assets and liabilities you calculated in part i above. For purposes of these calculations, use year-end balance sheet numbers and assume that the company's marginal tax rate, as approximated by the combined federal and state statutory rates is 35%.

	As reported	Proforma
Total assets
Total liabilities
Liabilities to equity ratio
Return on assets
Return on equity

3. In your opinion, which set of ratios better reflects the economic reality, the as reported or the pro forma ratios? Explain.

Consolidated Balance Sheets Johnson & Johnson and Subsidiaries At December 30, 2007 and December 2006 (Dollars in Million becept Share and Per Share Data Note 1 2007 2006 $ 7.770 4,083 Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, S160) Inventories (Notes 1 and 2) Deferred taxes on income (Note 8 Prepaid expenses and other receivables Total current assets 1545 9,444 5,110 2,609 3,467 29,945 8,712 4,889 2,094 3,196 22,975 Marketable securities, non current (Notes 1 and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill, net (Notes 1 and 7) Deferred taxes on income (Note 8) Other assets (Note 5) Total assets 2 14,185 14,640 14123 4,889 3.170 $80,954 16 13,044 15,348 13 340 3.210 2.623 70,556 Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued liabilities Accrued rebates, returns and Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities whers and promotions $2,463 6,909 6,412 2,318 1,512 223 19,837 4,579 5.691 4.587 2,189 1.391 724 19.161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities 7,074 1,493 5,402 3,829 37,635 2,014 1,319 5,584 3,160 31,238 Shareholders' equity Preferred stock - without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) Accumulated other comprehensive income (Note 12) Retained earnings 3,120 (693) 55,280 57,707 3,120 (2.118) 49,290 50,292 Less: common stock held in treasury, at cost (Note 20) (279,620,000 shares and 226,612,000 shares) Total shareholders' equity Total liabilities and shareholders' equity 14.389 43,319 10,974 39,318 70,556 $80,954 See Notes to Consolidated Financial Statements Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries Dolars lations Except Per ShareFigures) Oote 1) 2007 2006 2005 Sales to customers $61,095 53,324 50,514 Cost of products sold 15,057 14,010 36,504 38,267 17,433 7,125 559 Gross profit Selling, marketing and administrative expenses Research expense Purchased in process research and development (Note 17) Restructuring (Note 22) Interest income Interest expense, net of portion capitalized (Note 3) Other (income) expense, net 17,211 6,462 362 17.751 43,344 20,451 7,680 B07 745 (452) 296 534 30,061 13,283 2,707 (829) 63 (671) 23,680 14,587 3,534 (487) 54 (214) 23,388 13.116 3,056 Earnings before provision for taxes on income Provision for taxes on income (Note 8) Net earnings $10,576 11,053 10.060 Basic net earnings per share (Notes 1 and 19) S 3,67 3.76 3.38 3.35 Diluted net earnings per share (Notes 1 and 19) $ 3,63 3.73 See Notes to Consolidated Financial Statements Consolidated Statements of Equity Accu Catariin Million Note 1) Comprehensive Become Total Johnson & Johnson and Subsidiaries Note Receivable Retained stick this O Comprensive Conan Stock Plan (ESOP) Amund 35,945 (11) (515) 3,120 (6,004) 10.060 (3.793) $32,535 10.060 (3,793) 10,060 1,485 369 (1,717) 27 (132) 203 1.458 501 (1.920) (415) (16) 26 165 (415) (16) 26 165 (15) 9,805 (415) (16) 26 165 Gains on a 11 Balance, January 2, 2005 Net earnings Cash dividends pald Employee stock compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tak: Currency translation adjustment Unrealized losses on securities Employee benefit plans in derivatives & hedges Reclassification adjustment Total comprehensive income Note receivable from ESOP Balance, January 1, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net of tax Currency translation adjustment Unrealized losses on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income (755) 3,120 (5,965) 11 $38,710 11,053 (4.267) 11,053 42,310 11,053 (4.267) 181 (10) 1,858 26 (6,722) 23 1,677 36 (6,722) 23 362 362 (9) (34) (6) (9) 11,357 362 (9) (1,710) (6) (1,710) (6) (2,118) 3,120 (10,974) $39,318 10,576 (4,670) 49,290 10,576 10,576 (4,670) 131 (4) Balance, December 31, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase 48 of common stock Other Other comprehensive income, net of tax: Currency translation adjustment Unrealized gains on securities Losses Wofit plans & hedges Reclassification adjustment Total comprehensive income 2,311 (5.607) (19) (24) 2,180 13 (5,607) (19) (24) 786 23 670 (54) 786 23 670 (54) (5) 11,996 786 23 670 (54) Balance, December 30, 2007 $43,319 55,280 - (693) 3,120 (14,388) See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries Dolarsinimlote 13 2007 2006 2005 $ 10,576 11,053 10,060 2,093 2,177 659 559 - (1,168) 362 Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles Stock based compensation Purchased in process research and development Intangible asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) in accounts payable and accrued liabilities Increase/decrease in other current and non-current assets Increase in other current and non-current liabilities Net cash flows from operating activities 2,777 698 807 678 (1,762) 22 (416) 14 (235) (31) 2,642 (699) (210) 1,750 (269) 410 (569) (396) (911) 542 343 (351) 564 15,249 14.248 11,799 Cash flows from investing activities Additions to property, plant and nd equipment Proceeds from the disposal of assets Acquisitions, net of cash acquired (Note 17) iments Other (primarily intangibles) Net cash used by Investing activities (2.942) 230 (1,388) (9,659) 7,988 (368) (2,666) 511 (18,023) (467) 426 (72) (20,291) (2,632) 154 (987) (5.660) 9,187 (341) (6,139) (279) (4,670) (5,607) 19,626 (21,691) 5.100 (18) 1.562 (3,793) (1.717) 1,215 (732) (4,267) (6,722) 6,385 (2.633) 6 (13) 1,135 (6,109) (196) 774 (5.698) (4,443) 275 3,687 4,083 $ 7.770 180 (11,972) 16,055 (225) 6,852 9,203 16,055 4,083 Cash flows from financing activities Dividends to shareholders Repurchase of common stock Proceeds from short-term debt Retirement of short-term debt Proceeds from long-term debt Retirement of long-term debt Proceeds from the exercise of stock options/excess tax benefits Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents (Decrease]/increase in cash and cash equivalents Cash and cash equivalents, beginning of year (Note 1) Cash and cash equivalents, end of year (Note 1) Supplemental cash flow data Cash paid during the year for. Interest Income taxes Supplemental schedule of noncash investing and financing activities Treasury stock issued for employee compensation and stock option plans, net of cash proceeds Conversion of debt Acquisitions Fair value of assets acquired Fair value of liabilities assumed Net cash paid for acquisitions See Notes to Condelidated Financial Statements $ 314 4,099 143 4,250 151 3,429 $ 738 9 622 04 26 818 369 $ 1,620 (232) 19,306 (1.283) 1,128 (141) 987 $ 1,388 18,023 12. Accumulated Other Comprehensive Income Components of other comprehensive income/(loss) consist of the following: Umalized Gan Am Foren. Gan Currency closeslan Employee Derivative Comprehe Translation Securities Benet Plan Hedges become/cow $(105) 86 (346) (150) (515) The tax effect on the unrealized gains/Closses) on the equity securities balance is an expense of $46 million, $33 million and $38 million in 2007, 2006 and 2005, respectively. The tax effect related to employee benefit plans was $349 million, 5891 million and $160 million in 2007, 2006 and 2005, respectively. The tax effect on the gains/(losses) on derivatives and hedges are gains of $24 million in 2007 and losses of $4 million and $11 million in 2006 and 2005, respectively. See Note 15 for additional information relating to derivatives and hedging The currency translation adjustments are not currently adjusted for income taxes as they relate to permanent investments in international subsidiaries. 112 (415) $(520) (16) 70 26 (320) 53 165 15 (240) (755) darsinis) Jan.2.2005 2005 changes Net change due to hedging transactions Net amount reclassed to neteaming Net 2005 changes Jan 2006 2006 changes Net change due to hedging transactions Net amount reclassed to neteamings Net 2006 changes Dec 31, 2006 2007 changes Net change due to hedging transactions Net amount recessed tonet earrings Net 2007 changes Dec 30, 2007 17 362 $(158) (9) (1.710) 61 (2,030) (23) (6) (1,363) 9 (2,118) (78) 13. Pensions and Other Benefit Plans The Company sponsors various retirement and pension plans including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides postretirement benefits, primarily health care, to all U.S. retired employees and their dependents. Many international employees are covered by government- sponsored programs and the cost to the Company is not significant Retirement plan benefits are primarily based on the employee's compensation during the last three to five years before retirement and the number of years of service. Interna tional subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided The C e Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future. The Company uses the date of its consolidated financial statements (December 30, 2007 and December 31, 2006, respectively) as the measurement date for all U.S. and interna. tional retirement and other benefit plans. In September 2006, Statement of Financial Accounting Standards (SFAS)No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plons was issued and amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend- ment of FASB Statements No. 87, 88, 106 and 132(R). The incremental effect of applying FASB No 158 was a $1.7 billion reduction in Shareholder's Equity, net of deferred taxes. 24 (54) (45) 786 $ 628 1.425 23 670 84 (1.360) (693) Total comprehensive income for 2007 includes reclassification adjustment gains of $7 million realized from the sale of equity securities and the associated tax expense of $2 million Total other comprehensive income for 2006 includes reclassifi- cation adjustment gains of $13 million realized from the sale of equity Securities and the associated tax expense of $4 million. Total other comprehensive income for 2005 includes reclassifi- cation adjustment gains of $23 million realized from the sale of equity securities and the associated tax expense of $8 million. Net periodic benefit costs for the Company's defined benefit retirement plans and other benefit plans for 2007, 2006 and 2005 include the following components: Retirement Plans Other Benefit Plans Dalar Million 2007 2006 2005 2007 2006 2005 Service cos! $ 597 552 462 $140 122 56 Interest cost 656 570 498 149 136 87 Expected return on plan assets (809) (701) (579) 2) (3) (3) Amortization of prior service cost 10 10 12 (7) ) (7) Amortization of net transition asset 1 (2) Recognized actuarial losses 186 251 219 za 66 74 25 Curtaiments and settlements 2 Net periodic benefit cost $ 646 685 602 $346 322 The net periodic benefit cost attributable to U.S. retirement plans was $379 million in 2007, $423 million in 2006 and $370 million in 2005 Amounts expected to be recognized in net periodic benefit cost Dollars in Min in the coming year for the Company's defined benefit retirement Amortization of net transition obligation S 2 plans and other postretirement plans: Amortization of net actuarial losses 132 Amortization of prior service cost 5 The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. Other Benefit Plans 2007 2006 2006 2005 2005 6.5094 6.00 5.75 6.5096 6.00 5.75 Dollars in Milions) U.S. Benefit Plans Discount rate Expected long term rate of return on plan assets Rate of increase in compensation levels International Benefit Plans Discountate Expected long-term rate of return on plan assets Rate of increase in compensation levels 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 5.50% 5.00 4.75 6.50% 6.00 5.00 8.25 4.00 8.00 3.75 8.29 3.75 4.50 4.50 The Company's discount rates are determined by considering current yield curves representing high quality, long-term fived income instru- ments. The resulting discount rates are consistent with the duration of plan liabilities. The expected long-term rate of return on plan assets assumption is determined using a building block approach, con- sidering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns The following table displays the assumed health care cost trend rates, for all individuals: Health Care Plans 2007 Health care cost trend rate assumed for next year 9.00% 9.00 Rate to which the cost trend rate is assumed to decline (ultimate trend! 5.00% 4.50 Year the rate reaches the ultimate trend rate 2014 2012 A one-percentage-point change in assumed health care cost trend rates would have the following effect: One Percent Point Increase (Dollars in Health Care Plans Total interest and service cost Postretirement benefit obligation . $ 35 320 $(27) (259) 200 2006 The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2007 and 2006 for the Company's defined benefit retirement plans and other postretirement plans: Retirement Plans Other feat Plans alors in Milan) 2007 Change in Benefit Obligation Projected benefit obligation-beginning of year $11,660 10,171 $ 2,668 2.325 Service cost 597 552 1401 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial (gain losses (876) 999 (1) 130 Divestbures & acquisitions 79 443 8 101 Curtailments & settlements (46) (7) - Benefits paid from plan (481) (402) (255) (147) Effect of exchange rates 337 378 12 Projected benefit obligation - end of year $12,002 11,660 $2,721 2,668 Change in Plan Assets Plan assets at fair value-beginning of year $9,538 8,108 30 34 Actualmebum on plan assets 743 966 4 2 Company contributions 517 259 250 141 Plan participant contribution 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Benefits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Plan assets at fair value-end of year $10,469 9,538 $ 29 30 Funded statust-end of year ES (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following: Non-current assets $ 481 259 Current liabilities (43) (26) (81) Non-current abilities 0.971) 2,355) (2.430) 2,557) Total recognized in the consolidated balance sheet-end of year $ (1,533) (2,122) S(2,692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following Net actuarial loss (gain) $ 1,027 1,996 $ 1,013 1,046 Prior service cost (credit) 51 44 (36) (42) Unrecognized net transition asset Total before taxellects $ 1.085 2,047 977 1,004 Accumulated Benefit Obligations - end of year $10,282 9,804 Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net periodic benefit cos! S646 S 346 Net actuarial loss (gain) 11 Amortization of net actuarial loss 1435 (13) Prior service cost 9 134 Amortization of prior service cost 6 Effect of exchange rates 23 13 Total recognized in other comprehensive income before tax 5 (962) $ (27) Total recognized in net periodic benefit cost and other comprehensive income $ (316) $ 319 (262 (555) Plans with accumulated benefit obligations in excess of plan assets consist of the following: Rrtiment Plans Dolors in Million) 2006 Accumulated benefit obligation $(4914) (3,085) Projected benefit obligation (5,233) (3.561) Plan assets at fair value 3.735 1,650 Strategic asset allocations are determined by country, based on allocations are consistent with these types of plans. Emphasis is the nature of the liabilities and considering the demographic placed on diversifying equities on a broad basis combined with composition of the plan participants (average age, years of ser- currency matching of the fixed income assets. vice and active versus retiree status). The Company's plans are considered non mature plans and the long-term strategic asset The following table displays the projected future benefit payments from the Company's retirement and other benefit plans: Dollars in Million 2009 2010 2011 2012 2010-200 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans - gross $274 180 184 188 192 1,080 Medicare rebates (11) (12) (13) (14) (94 Other benefit plansnet $265 $169 $172 $175 $178 $986 The Company was not required to fund its U.S. retirement plans appropriate to meet the long-term obligations of the plans. In in 2007 and is not required, nor does it anticipate funding in certain countries other than the Un United States, the tu the funding of 2008 to meet minimum statutory funding requirements. Inter- pension plans is not a common practice as funding provides no national plans are funded in accordance with local regulations economic benefit. Consequently the Company has several pen- Additional discretionary contributions are made when deemed sion plans which are not funded. The following table displays the projected future minimum contributions to the Company's U.S. and international unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. | bolars is Matheese) 2004 2001 2010 2011 2012 2013-2017 Projected future contributions Unlunded US retirement plans $28 30 33 35 38 238 Unfunded International retirement plans $23 25 28 29 31 178 Tugit Allocation 2008 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows Percent of Plansett 2007 2006 U.S. Retirement Plans Equity Securities 799 7896 Debt securities 21 22 Total plan assets 100% 100% International Retirement Plans Equity Securities 67% 67% Debt securities 32 32 Real estate and other 1 1 Total plan assets 10096 10096 75% 25 10096 6796 33 100% The Company's other benefit plans are unfunded except for U.S. life insurance contract assets of $29 million and $30 million at December 30, 2007 and December 31, 2006, respectively. The fair value of Johnson & Johnson common stock directly held in plan assets was $462 million (4.4% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006 Consolidated Balance Sheets Johnson & Johnson and Subsidiaries At December 30, 2007 and December 2006 (Dollars in Million becept Share and Per Share Data Note 1 2007 2006 $ 7.770 4,083 Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, S160) Inventories (Notes 1 and 2) Deferred taxes on income (Note 8 Prepaid expenses and other receivables Total current assets 1545 9,444 5,110 2,609 3,467 29,945 8,712 4,889 2,094 3,196 22,975 Marketable securities, non current (Notes 1 and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill, net (Notes 1 and 7) Deferred taxes on income (Note 8) Other assets (Note 5) Total assets 2 14,185 14,640 14123 4,889 3.170 $80,954 16 13,044 15,348 13 340 3.210 2.623 70,556 Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued liabilities Accrued rebates, returns and Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities whers and promotions $2,463 6,909 6,412 2,318 1,512 223 19,837 4,579 5.691 4.587 2,189 1.391 724 19.161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities 7,074 1,493 5,402 3,829 37,635 2,014 1,319 5,584 3,160 31,238 Shareholders' equity Preferred stock - without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) Accumulated other comprehensive income (Note 12) Retained earnings 3,120 (693) 55,280 57,707 3,120 (2.118) 49,290 50,292 Less: common stock held in treasury, at cost (Note 20) (279,620,000 shares and 226,612,000 shares) Total shareholders' equity Total liabilities and shareholders' equity 14.389 43,319 10,974 39,318 70,556 $80,954 See Notes to Consolidated Financial Statements Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries Dolars lations Except Per ShareFigures) Oote 1) 2007 2006 2005 Sales to customers $61,095 53,324 50,514 Cost of products sold 15,057 14,010 36,504 38,267 17,433 7,125 559 Gross profit Selling, marketing and administrative expenses Research expense Purchased in process research and development (Note 17) Restructuring (Note 22) Interest income Interest expense, net of portion capitalized (Note 3) Other (income) expense, net 17,211 6,462 362 17.751 43,344 20,451 7,680 B07 745 (452) 296 534 30,061 13,283 2,707 (829) 63 (671) 23,680 14,587 3,534 (487) 54 (214) 23,388 13.116 3,056 Earnings before provision for taxes on income Provision for taxes on income (Note 8) Net earnings $10,576 11,053 10.060 Basic net earnings per share (Notes 1 and 19) S 3,67 3.76 3.38 3.35 Diluted net earnings per share (Notes 1 and 19) $ 3,63 3.73 See Notes to Consolidated Financial Statements Consolidated Statements of Equity Accu Catariin Million Note 1) Comprehensive Become Total Johnson & Johnson and Subsidiaries Note Receivable Retained stick this O Comprensive Conan Stock Plan (ESOP) Amund 35,945 (11) (515) 3,120 (6,004) 10.060 (3.793) $32,535 10.060 (3,793) 10,060 1,485 369 (1,717) 27 (132) 203 1.458 501 (1.920) (415) (16) 26 165 (415) (16) 26 165 (15) 9,805 (415) (16) 26 165 Gains on a 11 Balance, January 2, 2005 Net earnings Cash dividends pald Employee stock compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tak: Currency translation adjustment Unrealized losses on securities Employee benefit plans in derivatives & hedges Reclassification adjustment Total comprehensive income Note receivable from ESOP Balance, January 1, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net of tax Currency translation adjustment Unrealized losses on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income (755) 3,120 (5,965) 11 $38,710 11,053 (4.267) 11,053 42,310 11,053 (4.267) 181 (10) 1,858 26 (6,722) 23 1,677 36 (6,722) 23 362 362 (9) (34) (6) (9) 11,357 362 (9) (1,710) (6) (1,710) (6) (2,118) 3,120 (10,974) $39,318 10,576 (4,670) 49,290 10,576 10,576 (4,670) 131 (4) Balance, December 31, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase 48 of common stock Other Other comprehensive income, net of tax: Currency translation adjustment Unrealized gains on securities Losses Wofit plans & hedges Reclassification adjustment Total comprehensive income 2,311 (5.607) (19) (24) 2,180 13 (5,607) (19) (24) 786 23 670 (54) 786 23 670 (54) (5) 11,996 786 23 670 (54) Balance, December 30, 2007 $43,319 55,280 - (693) 3,120 (14,388) See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries Dolarsinimlote 13 2007 2006 2005 $ 10,576 11,053 10,060 2,093 2,177 659 559 - (1,168) 362 Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles Stock based compensation Purchased in process research and development Intangible asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) in accounts payable and accrued liabilities Increase/decrease in other current and non-current assets Increase in other current and non-current liabilities Net cash flows from operating activities 2,777 698 807 678 (1,762) 22 (416) 14 (235) (31) 2,642 (699) (210) 1,750 (269) 410 (569) (396) (911) 542 343 (351) 564 15,249 14.248 11,799 Cash flows from investing activities Additions to property, plant and nd equipment Proceeds from the disposal of assets Acquisitions, net of cash acquired (Note 17) iments Other (primarily intangibles) Net cash used by Investing activities (2.942) 230 (1,388) (9,659) 7,988 (368) (2,666) 511 (18,023) (467) 426 (72) (20,291) (2,632) 154 (987) (5.660) 9,187 (341) (6,139) (279) (4,670) (5,607) 19,626 (21,691) 5.100 (18) 1.562 (3,793) (1.717) 1,215 (732) (4,267) (6,722) 6,385 (2.633) 6 (13) 1,135 (6,109) (196) 774 (5.698) (4,443) 275 3,687 4,083 $ 7.770 180 (11,972) 16,055 (225) 6,852 9,203 16,055 4,083 Cash flows from financing activities Dividends to shareholders Repurchase of common stock Proceeds from short-term debt Retirement of short-term debt Proceeds from long-term debt Retirement of long-term debt Proceeds from the exercise of stock options/excess tax benefits Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents (Decrease]/increase in cash and cash equivalents Cash and cash equivalents, beginning of year (Note 1) Cash and cash equivalents, end of year (Note 1) Supplemental cash flow data Cash paid during the year for. Interest Income taxes Supplemental schedule of noncash investing and financing activities Treasury stock issued for employee compensation and stock option plans, net of cash proceeds Conversion of debt Acquisitions Fair value of assets acquired Fair value of liabilities assumed Net cash paid for acquisitions See Notes to Condelidated Financial Statements $ 314 4,099 143 4,250 151 3,429 $ 738 9 622 04 26 818 369 $ 1,620 (232) 19,306 (1.283) 1,128 (141) 987 $ 1,388 18,023 12. Accumulated Other Comprehensive Income Components of other comprehensive income/(loss) consist of the following: Umalized Gan Am Foren. Gan Currency closeslan Employee Derivative Comprehe Translation Securities Benet Plan Hedges become/cow $(105) 86 (346) (150) (515) The tax effect on the unrealized gains/Closses) on the equity securities balance is an expense of $46 million, $33 million and $38 million in 2007, 2006 and 2005, respectively. The tax effect related to employee benefit plans was $349 million, 5891 million and $160 million in 2007, 2006 and 2005, respectively. The tax effect on the gains/(losses) on derivatives and hedges are gains of $24 million in 2007 and losses of $4 million and $11 million in 2006 and 2005, respectively. See Note 15 for additional information relating to derivatives and hedging The currency translation adjustments are not currently adjusted for income taxes as they relate to permanent investments in international subsidiaries. 112 (415) $(520) (16) 70 26 (320) 53 165 15 (240) (755) darsinis) Jan.2.2005 2005 changes Net change due to hedging transactions Net amount reclassed to neteaming Net 2005 changes Jan 2006 2006 changes Net change due to hedging transactions Net amount reclassed to neteamings Net 2006 changes Dec 31, 2006 2007 changes Net change due to hedging transactions Net amount recessed tonet earrings Net 2007 changes Dec 30, 2007 17 362 $(158) (9) (1.710) 61 (2,030) (23) (6) (1,363) 9 (2,118) (78) 13. Pensions and Other Benefit Plans The Company sponsors various retirement and pension plans including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides postretirement benefits, primarily health care, to all U.S. retired employees and their dependents. Many international employees are covered by government- sponsored programs and the cost to the Company is not significant Retirement plan benefits are primarily based on the employee's compensation during the last three to five years before retirement and the number of years of service. Interna tional subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided The C e Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future. The Company uses the date of its consolidated financial statements (December 30, 2007 and December 31, 2006, respectively) as the measurement date for all U.S. and interna. tional retirement and other benefit plans. In September 2006, Statement of Financial Accounting Standards (SFAS)No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plons was issued and amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend- ment of FASB Statements No. 87, 88, 106 and 132(R). The incremental effect of applying FASB No 158 was a $1.7 billion reduction in Shareholder's Equity, net of deferred taxes. 24 (54) (45) 786 $ 628 1.425 23 670 84 (1.360) (693) Total comprehensive income for 2007 includes reclassification adjustment gains of $7 million realized from the sale of equity securities and the associated tax expense of $2 million Total other comprehensive income for 2006 includes reclassifi- cation adjustment gains of $13 million realized from the sale of equity Securities and the associated tax expense of $4 million. Total other comprehensive income for 2005 includes reclassifi- cation adjustment gains of $23 million realized from the sale of equity securities and the associated tax expense of $8 million. Net periodic benefit costs for the Company's defined benefit retirement plans and other benefit plans for 2007, 2006 and 2005 include the following components: Retirement Plans Other Benefit Plans Dalar Million 2007 2006 2005 2007 2006 2005 Service cos! $ 597 552 462 $140 122 56 Interest cost 656 570 498 149 136 87 Expected return on plan assets (809) (701) (579) 2) (3) (3) Amortization of prior service cost 10 10 12 (7) ) (7) Amortization of net transition asset 1 (2) Recognized actuarial losses 186 251 219 za 66 74 25 Curtaiments and settlements 2 Net periodic benefit cost $ 646 685 602 $346 322 The net periodic benefit cost attributable to U.S. retirement plans was $379 million in 2007, $423 million in 2006 and $370 million in 2005 Amounts expected to be recognized in net periodic benefit cost Dollars in Min in the coming year for the Company's defined benefit retirement Amortization of net transition obligation S 2 plans and other postretirement plans: Amortization of net actuarial losses 132 Amortization of prior service cost 5 The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. Other Benefit Plans 2007 2006 2006 2005 2005 6.5094 6.00 5.75 6.5096 6.00 5.75 Dollars in Milions) U.S. Benefit Plans Discount rate Expected long term rate of return on plan assets Rate of increase in compensation levels International Benefit Plans Discountate Expected long-term rate of return on plan assets Rate of increase in compensation levels 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4.50 5.50% 5.00 4.75 6.50% 6.00 5.00 8.25 4.00 8.00 3.75 8.29 3.75 4.50 4.50 The Company's discount rates are determined by considering current yield curves representing high quality, long-term fived income instru- ments. The resulting discount rates are consistent with the duration of plan liabilities. The expected long-term rate of return on plan assets assumption is determined using a building block approach, con- sidering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns The following table displays the assumed health care cost trend rates, for all individuals: Health Care Plans 2007 Health care cost trend rate assumed for next year 9.00% 9.00 Rate to which the cost trend rate is assumed to decline (ultimate trend! 5.00% 4.50 Year the rate reaches the ultimate trend rate 2014 2012 A one-percentage-point change in assumed health care cost trend rates would have the following effect: One Percent Point Increase (Dollars in Health Care Plans Total interest and service cost Postretirement benefit obligation . $ 35 320 $(27) (259) 200 2006 The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2007 and 2006 for the Company's defined benefit retirement plans and other postretirement plans: Retirement Plans Other feat Plans alors in Milan) 2007 Change in Benefit Obligation Projected benefit obligation-beginning of year $11,660 10,171 $ 2,668 2.325 Service cost 597 552 1401 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial (gain losses (876) 999 (1) 130 Divestbures & acquisitions 79 443 8 101 Curtailments & settlements (46) (7) - Benefits paid from plan (481) (402) (255) (147) Effect of exchange rates 337 378 12 Projected benefit obligation - end of year $12,002 11,660 $2,721 2,668 Change in Plan Assets Plan assets at fair value-beginning of year $9,538 8,108 30 34 Actualmebum on plan assets 743 966 4 2 Company contributions 517 259 250 141 Plan participant contribution 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Benefits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Plan assets at fair value-end of year $10,469 9,538 $ 29 30 Funded statust-end of year ES (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following: Non-current assets $ 481 259 Current liabilities (43) (26) (81) Non-current abilities 0.971) 2,355) (2.430) 2,557) Total recognized in the consolidated balance sheet-end of year $ (1,533) (2,122) S(2,692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following Net actuarial loss (gain) $ 1,027 1,996 $ 1,013 1,046 Prior service cost (credit) 51 44 (36) (42) Unrecognized net transition asset Total before taxellects $ 1.085 2,047 977 1,004 Accumulated Benefit Obligations - end of year $10,282 9,804 Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net periodic benefit cos! S646 S 346 Net actuarial loss (gain) 11 Amortization of net actuarial loss 1435 (13) Prior service cost 9 134 Amortization of prior service cost 6 Effect of exchange rates 23 13 Total recognized in other comprehensive income before tax 5 (962) $ (27) Total recognized in net periodic benefit cost and other comprehensive income $ (316) $ 319 (262 (555) Plans with accumulated benefit obligations in excess of plan assets consist of the following: Rrtiment Plans Dolors in Million) 2006 Accumulated benefit obligation $(4914) (3,085) Projected benefit obligation (5,233) (3.561) Plan assets at fair value 3.735 1,650 Strategic asset allocations are determined by country, based on allocations are consistent with these types of plans. Emphasis is the nature of the liabilities and considering the demographic placed on diversifying equities on a broad basis combined with composition of the plan participants (average age, years of ser- currency matching of the fixed income assets. vice and active versus retiree status). The Company's plans are considered non mature plans and the long-term strategic asset The following table displays the projected future benefit payments from the Company's retirement and other benefit plans: Dollars in Million 2009 2010 2011 2012 2010-200 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans - gross $274 180 184 188 192 1,080 Medicare rebates (11) (12) (13) (14) (94 Other benefit plansnet $265 $169 $172 $175 $178 $986 The Company was not required to fund its U.S. retirement plans appropriate to meet the long-term obligations of the plans. In in 2007 and is not required, nor does it anticipate funding in certain countries other than the Un United States, the tu the funding of 2008 to meet minimum statutory funding requirements. Inter- pension plans is not a common practice as funding provides no national plans are funded in accordance with local regulations economic benefit. Consequently the Company has several pen- Additional discretionary contributions are made when deemed sion plans which are not funded. The following table displays the projected future minimum contributions to the Company's U.S. and international unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. | bolars is Matheese) 2004 2001 2010 2011 2012 2013-2017 Projected future contributions Unlunded US retirement plans $28 30 33 35 38 238 Unfunded International retirement plans $23 25 28 29 31 178 Tugit Allocation 2008 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows Percent of Plansett 2007 2006 U.S. Retirement Plans Equity Securities 799 7896 Debt securities 21 22 Total plan assets 100% 100% International Retirement Plans Equity Securities 67% 67% Debt securities 32 32 Real estate and other 1 1 Total plan assets 10096 10096 75% 25 10096 6796 33 100% The Company's other benefit plans are unfunded except for U.S. life insurance contract assets of $29 million and $30 million at December 30, 2007 and December 31, 2006, respectively. The fair value of Johnson & Johnson common stock directly held in plan assets was $462 million (4.4% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006