Question
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
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 companys financial condition and performance.
Fuzzy Button Clothing Company 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 sheets for Fuzzy Button Clothing Company for the years ending December 31, Year 2 and 1, respectively.
Fuzzy Button Clothing Company | |||||
---|---|---|---|---|---|
Balance Sheet | |||||
For the Year ended December 31 | |||||
Year 2 | Year 1 | Year 2 | Year 1 | ||
Assets | Liabilities and equity | ||||
Current assets: | Current liabilities: | ||||
Cash and equivalents | $110,700 | Accounts payable | $0 | $0 | |
Accounts receivable | $50,625 | $40,500 | Accruals | $7,031 | $0 |
Inventories | $148,500 | $118,800 | Notes payable | $39,844 | $37,500 |
Total current assets | $337,500 | $270,000 | Total current liabilities | $37,500 | |
Net fixed assets: | Long-term debt | $140,625 | $112,500 | ||
Net plant and equipment | $330,000 | Total debt | $187,500 | $150,000 | |
Common equity: | |||||
Common stock | $365,625 | $292,500 | |||
Retained earnings | $157,500 | ||||
Total common equity | $562,500 | $450,000 | |||
Total assets | $750,000 | $600,000 | Total liabilities and equity | $750,000 | $600,000 |
Given the information in the preceding balance sheetand assuming that Fuzzy Button Clothing Company has 50 million shares of common stock outstandingread each of the following statements, then identify the selection that best interprets the information conveyed by the balance sheet.
Statement #1: Fuzzy Buttons pool of relatively liquid assets, which are available to support the companys current and future sales, decreased from Year 1 to Year 2.
This statement is , because:
Fuzzy Buttons total current liabilities balance decreased by $67,500 between Year 1 and Year 2.
Fuzzy Buttons total current liabilities balance increased from $40,500 to $50,625 between Year 1 and Year 2.
Fuzzy Buttons total current asset balance decreased from $337,500 to $270,000 between Year 1 and Year 2.
Fuzzy Buttons total current asset balance actually increased from $270,000 to $337,500 between Year 1 and Year 2.
Statement #2: Over the past two years, Fuzzy Button Clothing Company has relied more on the use of short-term debt than on long-term debt financing.
This statement is , because:
Fuzzy Buttons total current liabilities increased by $9,375, while its use of long-term debt increased by $28,125.
Fuzzy Buttons total current liabilities decreased by $9,375, while its long-term debt account decreased by $28,125.
Fuzzy Buttons total notes payable increased by $2,344, while its common stock account increased by $73,125.
Statement #3: The book value per share of Fuzzy Buttons stock in Year 2 was $11,250.
This statement is , because:
The per-share book value is calculated by dividing the companys total assets by the number of outstanding shares of common stock.
The per-share book value is calculated by dividing the companys total common equity by the number of outstanding shares of common stock.
The per-share book value is calculated by dividing the companys total debt by the number of outstanding shares of common stock.
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.
Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Fuzzy Button Clothing Companys balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?
The companys assets should be listed from those carrying the largest balance to those with the smallest balance.
The companys assets should be listed in the order in which they are to be converted into cash.
The companys assets should be listed in alphabetical order.
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