The 1994 annual report of General Mills reported the following (dollars in millions). 1994 1993 Current assets $1,129.2 $1,076.9 Current liabilities 1,832.1 1,558.8 Included in current liabilities are notes payable in the amount of $433.3 million and $339.6 million for 1994 and 1993, respectively. In the footnotes the company discloses that the dollar 524 Part 4 Liabilities and Stockholders’ Equity: A Closer Look amounts of short-term notes payable listed on the balance sheet are net of $250 million and $200 million in 1994 and 1993, respectively. Because the credit agreement covering these notes “provides us with the ability to refinance short-term borrowings on a long-term basis, we therefore have reclassified a portion of our notes payable to long-term debt.” REQUIRED:

a. Explain what is meant by the footnote disclosure.

b. What effect did the reclassification have on the company’s 1994 and 1993 current ratios?

c. Explain why one might claim that a short-term note may appropriately be classified in the long-term debt section of the balance sheet, and discuss how managers may use discretion in this area to serve their own interests.