Question

Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.

(in millions)	2014	2013
Net sales	\(14,580	\)14,792
Net income	632	1,807
Total assets	15,153	15,474
Total liabilities	12,302	11,867
Common stock, $0.25 par value	105	105
Capital in excess of par value	678	626
Retained earnings	6,689	6,749
Treasury stock, at cost	3,470	2,999
Number of shares outstanding (in millions)	358	363

Instructions

1. What are some of the reasons that management purchases its own stock?
2. Explain how earnings per share might be affected by treasury stock transactions.
3. Calculate the debt to assets ratio for 2013 and 2014, and discuss the implications of the change.

Short answer

The solvency ratio of Kellogg Company of 2013 and 2014 is0.82% and 0.85%.

Step-by-step solution

Meaning of Financial Statement

Financial accounting can be a sub-category of the general scope of bookkeeping that deals with collecting and organizing monetary information by reason of showing it to external users in a proper format.

Discussing case 1 of Kellogg Company

A. Management might buy treasury offers to provide to share-holders a tax-efficient strategy for getting cash from the corporation. In addition,it might have to repurchase offers to have them available to be issued to individuals working out alternatives to buying offers, or management might buy treasury offers if it feels that its share price is low as well.

The occurring offer represents that the market price for the offers is low for Kellogg’s shares. Management might also utilize overabundance cashto buy offers to ward off a threatening takeover.

Finally, the administration might buy offers in an exertion to alter its capital structure. If it buys offers and issues obligation (or at least does not resign obligation), it'll increment the rate of obligation in its capital structure.

B. Earnings per share are calculated by dividing net pay by the weighted-average number of shares outstanding during the year.

In the event that a Treasury share purchase reduces shares, the denominator (the weighted-average number of exceptional offers) is reduced. As a result, profit per share regularly expands. In any case, since the purchase of Treasury offers depletes corporate resources, the potential for profit may be slim. In this case, the effect on profit per share can be reduced.

C. One measure of solvency is the ratio of liabilities to individual assets combined.This ratio appears to measure the number of dollars of resources supporting each dollar of liability, should the company be financially troubled. For 2013 and 2014, it can be calculated as:

Working notes:

$$\begin{gathered} \mathrm{solvency}\mathrm{ratio}2014=\frac{\mathrm{Debt}}{\mathrm{Total}\mathrm{Asset}} \\ =\frac{\$10,139}{\$11,01} \\ =0·85 \end{gathered}$$

$$\begin{gathered} \mathrm{solvency}\mathrm{ratio}2013=\frac{\mathrm{Debt}}{\mathrm{Total}\mathrm{Asset}} \\ =\frac{\$9,693}{\$11,847} \\ =0·82 \end{gathered}$$

Thisrepresents a slight reduction in the ratio of debt to add to resources. It can be judged that BHP Billiton's solvency is progressing, but this should be seen as undisputed and compared to the industry average.