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. Year 1 $0 675 0 625 Cold Goose Metal Works Inc. Balance Sheet for Year Ending December 31 (Millions of dollars) Year 2 Year 1 Year 2 Assets Liabilities and equity Current assets: Current liabilities: Cash and equivalents $1,845 Accounts payable $0 Accounts receivable 844 Accruals 117 Inventories 2,475 1,980 Notes payable 664 Total current assets $5,625 $4,500 Total current liabilities Net fixed assets: Long-term debt 2,344 Net plant and equipment $5,500 Total debt $3,125 Common equity: Common stock 6,094 Retained earnings Total common equity $9,375 Total assets $12,500 $10,000 Total liabilities and equity $12,500 $625 1,875 $2,500 4,875 2,625 $7,500 $10,000 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's sales between Years 1 and 2. This statement is because: Total inventories of raw materials, work-in-process, and final goods increased from $1,980 million to $2,475 million between Year 1 and Year 2 The accruals balance decreased by $117 million between Years 1 and 2 Total inventories of raw materials, work-in-process, and final goods decreased by $495 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 $169 increase in accounts receivable means either that year l'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 l's credit customers have repaid their owed balances and Year 2 credit sales have exceeded Year 1's credit sales The decrease from $844 million to $675 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 $1,980 million to $2,475 million reflects a net accumulation of new credit sales Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Cold Goose Metal Works Inc's balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)? The company's assets should be listed in alphabetical order. The company's assets should be listed from those carrying the largest balance to those with the smallest balance. The company's assets should be listed in the order in which they are to be converted into cash
