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 sheet.

Cute Camel Woodcraft Company 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	??	$2,767	Accounts payable	$0	$0
Accounts receivable	1,266	1,013	Accruals	176	0
Inventories	3,712	2,970	Notes payable	996	937
Total current assets	$8,437	$6,750	Total current liabilities	???	$937
Net fixed assets:			Long-term debt	3,515	2,813
Net plant and equipment	??	$8,250	Total debt	$4,687	$3,750
			Common equity:
			Common stock	9,141	7,313
			Retained earnings	???	3,937
			Total common equity	$14,063	$11,250
Total assets	$18,750	$15,000	Total liabilities and equity	$18,750	$15,000

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 net collection of inventory items increased by more than the firm's sales between Years 1 and 2.

This statement is Incorrect or correct , because:

a) The accruals balance decreased by $176 million between Years 1 and 2

b) Total inventories of raw materials, work-in-process, and final goods increased from $2,970 million to $3,712 million between Year 1 and Year 2

c) Total inventories of raw materials, work-in-process, and final goods decreased by $742 million between Year 1 and Year 2

Statement #2: In Year 2, Cute Camel Woodcraft Company was profitable.

This statement is incorrect or correct , because:

a) Cute Camel’s retained earnings account increased between the end of Years 1 and 2

b) Cute Camel’s total assets increased between Years 1 and 2

c) The cash and equivalents account increased between Years 1 and 2

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 incorrect or correct , because:

a) The decrease from $1,266 million to $1,013 million implies a net decrease in accounts receivable and that more customers are paying off their receivables balances than are buying on credit

b) The change from $2,970 million to $3,712 million reflects a net accumulation of new credit sales

c) The $253 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 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)?

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

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

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

Answer 1

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 incorrect or correct , because:

a) The decrease from $1,266 million to $1,013 million implies a net decrease in accounts receivable and that more customers are paying off their receivables balances than are buying on credit

b) The change from $2,970 million to $3,712 million reflects a net accumulation of new credit sale.

c) The $253 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

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