Suppose you have been presented with the following selected information taken from the financial statements of Kellogg Company.

KELLOGG COMPANY Balance Sheet (partial)
December 31 (in millions)
2014 2013 Total current assets $ 2,717 $ 2,427 Noncurrent assets 8,680 8,287 Total assets $11,397 $10,714 Current liabilities $ 4,044 $ 4,020 Long-term liabilities 4,827 4,625 Total liabilities 8,871 8,645 Shareholders’ equity 2,526 2,069 Total liabilities and shareholders’ equity $11,397 $10,714 Other information:
2014 2013 Net income (loss) $ 1,103 $ 1,004 Income tax expense 444 467 Interest expense 319 307 Cash provided by operations 1,503 1,410 Capital expenditures 472 453 Cash dividends 475 450 Note 6. Leases and Other Commitments The Company’s leases are generally for equipment and warehouse space. Future minimum annual lease payments under noncancelable operating leases were as follows: 2015, $159; 2016, $137; 2017, $112; 2018, $83; 2019, $56; after 2019, $183.

Instructions

(a) Calculate each of the following ratios for 2014 and 2013.
(1) Current ratio.
(2) Free cash flow.
(3) Debt to assets ratio.
(4) Times interest earned.

(b) Comment on the trend in ratios.

(c) Read the company’s note on leases. If the operating leases had instead been accounted for like a purchase, assets and liabilities would increase by approximately $584 million.
Recalculate the debt to assets ratio for 2014 in light of this information, and discuss the implications for analysis.AppendixLO2