Question

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.

Cute Camel Woodcraft 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 Cute Camel Woodcraft Company for the years ending December 31, Year 2 and 1, respectively.

Cute Camel Woodcraft 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		$92,250	Accounts payable	$0	$0
Accounts receivable	$42,188	$33,750	Accruals	$5,859	$0
Inventories	$123,750	$99,000	Notes payable	$33,203	$31,250
Total current assets	$281,250	$225,000	Total current liabilities		$31,250
Net fixed assets:			Long-term debt	$117,188	$93,750
Net plant and equipment		$275,000	Total debt	$156,250	$125,000
			Common equity:
			Common stock	$304,688	$243,750
			Retained earnings		$131,250
			Total common equity	$468,750	$375,000
Total assets	$625,000	$500,000	Total liabilities and equity	$625,000	$500,000

Given the information in the preceding balance sheet—and assuming that Cute Camel Woodcraft Company 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: Cute Camel’s pool of relatively liquid assets, which are available to support the company’s current and future sales, decreased from Year 1 to Year 2.

This statement is   , because:

Cute Camel’s total current liabilities balance increased from $33,750 to $42,188 between Year 1 and Year 2.

Cute Camel’s total current asset balance decreased from $281,250 to $225,000 between Year 1 and Year 2.

Cute Camel’s total current asset balance actually increased from $225,000 to $281,250 between Year 1 and Year 2.

Cute Camel’s total current liabilities balance decreased by $56,250 between Year 1 and Year 2.

Statement #2: On December 31 of Year 2, Cute Camel Woodcraft Company had $115,312 of actual money that it could have spent immediately.

This statement is   , because:

The funds recorded in Cute Camel’s accounts receivable account represents funds that are either cash or can be converted into cash almost immediately.

Cute Camel’s Year 2 cash and equivalents balance is $290,250.

The funds recorded in Cute Camel’s cash and equivalents account represents funds that are either cash or can be converted into cash almost immediately.

Statement #3: One way to interpret the change in Cute Camel’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 $42,188 to $33,750 implies a net decrease in accounts receivable and that more customers are paying off their receivables balances than are buying on credit.

The $8,438 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 change from $99,000 to $123,750 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.

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Cute Camel Woodcraft Company’s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company’s debts should be listed from those carrying the largest balance to those with the smallest balance.

The company’s debts are listed in the order in which they are to be repaid.

The company’s debts should be listed in order of their liquidity.

Answer 1

Answer Part A:

Completed balance sheet is as follows:

Working:

Net plant and equipment = Total assets - Total current assets = 625000 - 281250 = $343,750

Cash and equivalents = Total current assets - Inventories - Accounts receivable = 281250 - 123750 - 42188 = $115,312

Retained earnings = Total common equity - Common stock = 468750 - 304688 = $164,062

Total current liabilities = Accounts payable + Accruals + Notes payable = 0 + 5859 + 33203 = $39,062

Answer 1:

Statement #1: Cute Camel’s pool of relatively liquid assets, which are available to support the company’s current and future sales, decreased from Year 1 to Year 2.

This statement is incorrect, because:

Correct choice is:

Cute Camel’s total current asset balance actually increased from $225,000 to $281,250 between Year 1 and Year 2.

Explanation:

As we observe from balance sheet Option 1, 2 and 4 are incorrect.

The statement is incorrect as Cute Camel’s total current asset balance actually increased from $225,000 to $281,250 between Year 1 and Year 2.

Answer 2:

Statement #2: On December 31 of Year 2, Cute Camel Woodcraft Company had $115,312 of actual money that it could have spent immediately.

This statement is true , because:

Correct option is:

The funds recorded in Cute Camel’s cash and equivalents account represents funds that are either cash or can be converted into cash almost immediately.

Explanation:

Option 1 and 2 are incorrect.

Cash and cash equivalent of year 2 is $115,312 which represents funds that are either cash or can be converted into cash almost immediately.

Answer 3:

Statement #3: One way to interpret the change in Cute Camel’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 true , because:

Correct option is:

The change from $99,000 to $123,750 reflects a net accumulation of new credit sales.

Answer 4:

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 decrease if the firm buys a new plant and equipment at a cost of $1 million with liquid capital.

Answer 5:

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Cute Camel Woodcraft Company’s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

Correct option is:

The company’s debts are listed in the order in which they are to be repaid.

Explanation:

As per GAAP liabilities are listed in the order in which they mature.This means company’s debts are listed in the order in which they are to be repaid.

Option 1 and option 3 are incorrect.