Prepare Problem 1-39 (General Mills).In addition to the problem statement set forth in the textbook, you will need the 2014 income statement and balance sheets for General Mills (GM):

GeneralMillsFinancials2014.xlsx

Required:

• What if General Mills had consolidated its share in its investments that are currently accounted for under the equity method? (In other words, it had combined its share of the assets, liabilities, revenues and expenses of these investments with the amounts already reported in its financial statements.) Show how how the following financial statement ratios for GM in 2014would change:
• Profit margin (net income divided by sales);
• Return on assets (net income divided by total assets as of the end of the fiscal year);
• Total liabilities divided by total assets;
• Total liabilities divided by shareholders equity.
• Consider, and be prepared to discuss the pros and cons of two alternatives to the equity method which are not permitted under GAAP, but have been at one time or another been considered as alternatives:
• Full consolidation of the investments;
• Consolidation of GM's proportionate share of the investments.

In its May 25, 2014 balance sheet, General Mills reports a $1,146 million "Other assets" account, of which $506 million are equity method investments in joint ventures. (Note that General Mills' fiscal

year end is the last Sunday in May [i.e., the exact date is variable and the fiscal year can be either 52 or 53 weeks in length]. Fiscal years 2014, 2013 and 2012 each consisted of 52 weeks.) The Company

discusses its investments in joint ventures in the following footnote to its 2014 SEC Form 10-K:

We have a 50% equity interest in Cereal Partners Worldwide (CPW), which manufactures and mar- kets ready-to-eat cereal products in more than 130 countries outside the United States and Canada. CPW also markets cereal bars in several European countries and manufactures private label cereals for customers in the United Kingdom. We have guaranteed a portion of CPW's debt and its pension obli- gation in the United Kingdom. We also have a 50% equity interest in HagenDazs Japan, Inc. (HDJ). This joint venture manufactures and markets Hagen-Dazs ice cream products and frozen novelties.

Joint venture related financial information is as follows: (in millions)

May 25, 2014

Cumulative investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $508 Goodwill and other intangibles. . . . . . . . . . . . . . . . . . . . . . . . . 563 Aggregate advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332

(in millions) 2014

Total net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,499 Grossmargin .......................................... 1,030

May 26, 2013

$479 537 392

Fiscal Year

2013 2012

$2,553 2,582 1,057 1,084 260 250 202 189

May 26, 2013

$ 977 1,088 1,717

115

Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Earnings after income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .

(in millions)

Currentassets ..................................... Noncurrentassets .................................. Currentliabilities.................................... Noncurrentliabilities.................................

. . . . 219 . . . . 169

May 25, 2014

$1,031 1,030 1,779

110

a. How does General Mills account for its investments in joint ventures? How are these investments reflected on General Mills' balance sheet, and how generally is income recognized on these investments?

b. Does the $506 million investment included in other assets on General Mills' balance sheet sufficiently reflect the assets and liabilities required to conduct these operations? Explain.

c. Do you believe that the liabilities of these joint venture entities represent actual obligations of General Mills? Explain.

d. What potential problem(s) does equity method accounting present for analysis purposes?