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 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.

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 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 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:

Cold Goose’s total current asset balance increased from $11,250 million to $14,062 million between Year 1 and Year 2

Cold Goose’s total current liabilities balance increased from $1,688 million to $2,109 million between Year 1 and Year 2

Cold Goose’s 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 Goose’s total current liabilities increased by $391 million, while its use of long-term debt increased by $1,171 million

Cold Goose’s total current liabilities decreased by $391 million, while its long-term debt account decreased by $1,171 million

Cold Goose’s 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 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 $421 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 $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.

Answer 1

All the variances tie back to the statements. Some statements mention current liabilities, however, its actually current assets -

Refer these two statements -

Year 1 and Year 2

Cold Goose’s total current liabilities balance increased from $1,688 million to $2,109 million between Year 1 and Year 2

Cold Goose’s total current liabilities balance decreased by $2,812 million between Year 1 and Year 2