$2.$ Balance sheet

The balance sheet provides a snapshot of the financial condition of a company. Investors and analysts use the information given on the balance sheet and other financial statements to make several interpretations regarding the company$$s financial condition and performance.

Cold Goose Metal Works Inc. is a hypothetical company. Suppose it has the following balance sheet items reported at the end of its first year of operation. For the second year, some parts are still incomplete. Use the information given to complete the balance sheet.

Cold Goose Metal Works Inc.

Balance Sheet for Year Ending December $31$

$($Millions of Dollars$)$

Year $2$ Year $1$ Year $2$ Year $1$

Assets Liabilities and equity

Current assets: Current liabilities:

Cash and equivalents $$7,380$ Accounts payable $$0$ $$0$

Accounts receivable $3,3752,700$ Accruals $4690$

Inventories $9,9007,920$ Notes payable $2,6562,500$

Total current assets $$22,500$ $$18,000$ Total current liabilities $$2,500$

Net fixed assets: Long$-$term debt $9,3757,500$

Net plant and equipment $$22,000$ Total debt $$12,500$ $$10,000$

Common equity:

Common stock $24,37519,500$

Retained earnings $10,500$

Total common equity $$37,500$ $$30,000$

Total assets $$50,000$ $$40,000$ Total liabilities and equity $$50,000$ $$40,000$

Given the information in the preceding balance sheet$$and assuming that Cold Goose Metal Works Inc. has $50$ million shares of common stock outstanding$$read each of the following statements, then identify the selection that best interprets the information conveyed by the balance sheet.

Statement #$1$: Cold Goose$$s net collection of inventory items increased by more than the firm sold between Years $1$ and $2.$

This statement is $,$ because:

The accruals balance decreased by $$469$ million between Years $1$ and $2.$

Total inventories of raw materials, work$-$in$-$process, and final goods increased from $$7,920$ million to $$9,900$ million between Year $1$ and Year $2.$

Total inventories of raw materials, work$-$in$-$process, and final goods decreased by $$1,980$ million between Year $1$ and Year $2.$

Statement #$2$: In Year $2,$ Cold Goose Metal Works Inc. was profitable.

This statement is $,$ because:

The cash and equivalents account increased between Years $1$ and $2.$

Cold Goose$$s retained earnings account increased between the end of Years $1$ and $2.$

Cold Goose$$s total assets increased between Years $1$ and $2.$

Statement #$3$: One way to interpret the change in Cold Goose$$s accounts receivable balance from Year $1$ to Year $2$ is that more customers purchased new items on credit rather than paying off existing credit accounts.

This statement is $,$ because:

The decrease from $$3,375$ million to $$2,700$ million implies a net decrease in accounts receivable and that more customers are paying off their receivables balances than are buying on credit.

The change from $$7,920$ million to $$9,900$ million reflects a net accumulation of new credit sales.

The $$675$ million increase in accounts receivable means either that Year $1$s existing credit customers are not paying off their owed balances and new or existing customers are making additional purchases on credit, or that Year $1$s credit customers have repaid their owed balances and Year $2$ credit sales have exceeded Year $1$s credit sales.

Based on your understanding of the different items reported on the balance sheet and the information they provide, if everything else remains the same, then the cash and equivalents item on the current balance sheet is likely to if the firm buys a new plant and equipment at a cost of $$1$ million with liquid capital.