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.

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 CompanyBalance Sheet for Year Ending December 31 (Millions of Dollars)

Cute Camel Woodcraft CompanyBalance 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		$6,457	Accounts payable	$0	$0
Accounts receivable	2,953	2,363	Accruals	410	0
Inventories	8,662	6,930	Notes payable	2,324	2,187
Total current assets	$19,687	$15,750	Total current liabilities		$2,187
Net fixed assets:			Long-term debt	8,203	6,563
Net plant and equipment		$19,250	Total debt	$10,937	$8,750
			Common equity:
			Common stock	21,328	17,063
			Retained earnings		9,187
			Total common equity	$32,813	$26,250
Total assets	$43,750	$35,000	Total liabilities and equity	$43,750	$35,000

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 she

Statement #1:Cute Camel’s net collection of inventory items increased by more than the firm sold between Years 1 and 2.

This statement is ______, because:

a) The accruals balance decreased by $410 million between Years 1 and 2

b) Total inventories of raw materials, work-in-process, and final goods increased from $6,930 million to $8,662 million between Year 1 and Year 2

c) Total inventories of raw materials, work-in-process, and final goods decreased by $1,732 million between Year 1 and Year 2

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

This statement is____, 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: If Cute Camel ever goes bankrupt, its common stockholders will be paid off first, then its debtholders and preferred stockholders.

This statement is _____, because:

a) Debtholders are treated as residual investors

b) Debtholders and preferred shareholders are considered residual investors

c) Common shareholders are treated as residual investors

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 issues $3 million of new common stock.

Answer 1