Question

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		$1,845	Accounts payable	$0	$0
Accounts receivable	844	675	Accruals	117	0
Inventories	2,475	1,980	Notes payable	664	625
Total current assets	$5,625	$4,500	Total current liabilities		$625
Net fixed assets:			Long-term debt	2,344	1,875
Net plant and equipment		$5,500	Total debt	$3,125	$2,500
			Common equity:
			Common stock	6,094	4,875
			Retained earnings		2,625
			Total common equity	$9,375	$7,500
Total assets	$12,500	$10,000	Total liabilities and equity	$12,500	$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:

The accruals balance decreased by $117 million between Years 1 and 2

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

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:

Cold Goose’s total assets increased between Years 1 and 2

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

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 change from $1,980 million to $2,475 million reflects a net accumulation of new credit sales

The $169 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

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

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 from those carrying the largest balance to those with the smallest balance.

The company’s assets should be listed in alphabetical order.

The company’s assets should be listed in the order in which they are to be converted into cash.

Answer 1

Statement 1 : true

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. This can be seen in the "inventory" line item on the assets side of the balance sheet

The accruals balance increased from Year 1 to Year 2

Statement 2 : true

retained earnings balance in year 2 = total common equity - common stock = 9375 - 6094 = 3281

The retained earnings balance has increased from Year 1 to Year 2

Therefore, the company was profitable

Statement 3 :false

Accounts receivable balance in Year 2 = Accounts receivable balance in Year 1 + credit sales - amounts received from customers

Increase in accounts receivable = 844 - 675 = 169

The $169 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

The company’s assets should be listed in the order in which they are to be converted into cash. As per GAAP, assets should be listed in the order of their liquidity