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		$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 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 liabilities balance decreased by $1,125 million between Year 1 and Year 2

Cold Goose’s total current liabilities balance increased from $675 million to $844 million between Year 1 and Year 2

Cold Goose’s total current asset balance actually increased from $4,500 million to $5,625 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 retained earnings account increased between the end of Years 1 and 2

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

The cash and equivalents account 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 change from $1,980 million to $2,475 million reflects a net accumulation of new 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 $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

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 the order in which they are to be converted into cash.

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

Answer 1

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