Question
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
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.
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 |
| $4,612 | Accounts payable | $0 | $0 |
Accounts receivable | 2,109 | 1,688 | Accruals | 293 | 0 |
Inventories | 6,187 | 4,950 | Notes payable | 1,660 | 1,562 |
Total current assets | $14,062 | $11,250 | Total current liabilities |
| $1,562 |
Net fixed assets: | Long-term debt | 5,859 | 4,688 | ||
Net plant and equipment |
| $13,750 | Total liabilities | $7,812 | $6,250 |
Common equity: | |||||
Common stock | 15,235 | 12,188 | |||
Retained earnings |
| 6,562 | |||
Total common equity | $23,438 | $18,750 | |||
Total assets | $31,250 | $25,000 | Total liabilities and equity | $31,250 | $25,000 |
Given the information in the preceding balance sheetand assuming that Cold Goose Metal Works Inc. 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: Cold Gooses 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:
Cold Gooses total current asset balance increased from $11,250 million to $14,062 million between Year 1 and Year 2
Cold Gooses total current liabilities balance increased from $1,688 million to $2,109 million between Year 1 and Year 2
Cold Gooses total current liabilities balance decreased by $2,812 million between Year 1 and Year 2
Statement #2: Over the past two years, Cold Goose Metal Works Inc. has relied more on the use of short-term debt than on long-term debt financing.
This statement is , because:
Cold Gooses total current liabilities increased by $391 million, while its use of long-term debt increased by $1,171 million
Cold Gooses total current liabilities decreased by $391 million, while its long-term debt account decreased by $1,171 million
Cold Gooses total notes payable increased by $98 million, while its common stock account increased by $3,047 million
Statement #3: One way to interpret the change in Cold Gooses 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 $421 increase in accounts receivable means either that Year 1s existing credit customers are not paying off their owed balances and new or existing customers are making additional purchases on credit, or that Year 1s credit customers have repaid their owed balances and Year 2 credit sales have exceeded Year 1s credit sales
The decrease from $2,109 million to $1,688 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 $4,950 million to $6,187 million reflects a net accumulation of new 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.
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