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 debt	$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.

1) 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 T/F? , because:

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

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

2) Statement #2: In Year 2, Cold Goose Metal Works Inc. was profitable.

This statement is T/F? , 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

3) Statement #3: If Cold Goose ever goes bankrupt, its common stockholders will be paid off first, then its debtholders and preferred stockholders.

This statement is T/F?   , because:

Debtholders are treated as residual investors

Common shareholders are treated as residual investors

Debtholders and preferred shareholders are considered residual investors

4) Based on your understanding of the different items reported on 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 debts are listed in the order in which they are to be repaid.

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

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

Answer 1

COLD GOOSE MATAL WORKS INC
Balance sheet
For the year ending December 31
( Millions of dollars )
Assets	Year 2	Year 1	Liabilities and equity	Year 2	Year1
Current assets :			Current liabilities :
Cash and cash equivalent	5766	4612	Accounts payable	0	0
Accounts Receivable	2109	1688	Accruals	293	0
Inventories	6187	4950	Notes Payable	1660	1562
Total current assets	14062	11250	Total current liabilities	1953	1562
Net fixed assets :			Long term debt	5859	4688
Net plant and equipment	17188	13750	Total debt	7812	6250
			Common Equity
			Common stock	15235	12188
			Retained earnings	8203	6562
			Total common equity	23438	18750
Total Assets	31250	25000	Total Liabilities and equity	31250	25000

Formulas :

Total current assets = cash and cash equivalent + accounts receivables + inventories

Total assets = Total current assets + net fixed assets

Total current liabilities = Accounts payable + accruals + notes payable

Total debt = Total current liabilities + long term debt

Total common stock = Common stock + Retained earning

Total liabilities and equity = Total debt + Total common equity

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

2) TRUE Beacuse Cold Goose’s retained earnings account increased between the end of Years 1 and 2

3 ) FALSE because Common shareholders are treated as residual investors

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