Suppose you have been presented with selected information taken from the fi nancial statements of Southwest Airlines Co., shown on the next page.

Instructions

(a) Calculate each of the following ratios for 2017 and 2016.

(1) Current ratio.

(2) Free cash fl ow.

(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 $1,600 million.

Recalculate the debt to assets ratio for 2017 in light of this information, and discuss the implications for analysis.

2017 2016 Total current assets $ 2,893 $ 4,443 Noncurrent assets 11,415 12,329 Total assets $14,308 $16,772 Current liabilities $ 2,806 $ 4,836 Long-term liabilities 6,549 4,995 Total liabilities 9,355 9,831 Shareholders’ equity 4,953 6,941 Total liabilities and shareholders’ equity $14,308 $16,772 Other information:
2017 2016 Net income (loss) $ 178 $ 645 Income tax expense 100 413 Interest expense 130 119 Cash provided by operations (1,521) 2,845 Capital expenditures 923 1,331 Cash dividends 13 14 Note 8. Leases The majority of the Company’s terminal operations space, as well as 82 aircraft, were under operating leases at December 31, 2017. Future minimum lease payments under noncancelable operating leases are as follows: 2018, $376,000; 2019, $324,000; 2020, $249,000; 2021, $208,000; 2022, $152,000; after 2023, $728,000.
SOUTHWEST AIRLINES CO.
Balance Sheet (partial)
December 31 (in millions)