Question

Assignment 03 - Financial Statements, Cash Flow, and Taxes Blue Hamster Manufacturing 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. Year 2 Year 1 $0 469 2,656 Blue Hamster Manufacturing Inc. Balance Sheet for Year Ending December 31 (Millions of Dollars) Year 2 Year 1 Assets Liabilities and equity Current assets: Current liabilities: Cash and equivalents $7,380 Accounts payable Accounts receivable 3,375 2,700 Accruals Inventories 9,900 7,920 Notes payable Total current assets $22,500 $18,000 Total current liabilities Net fixed assets: Long-term debt Net plant and equipment $22,000 Total debt Common equity Common stock Retained earnings Total common equity Total assets $50,000 $40,000 Total liabilities and equity 2,500 $2,500 7,500 $10,000 9,375 $12,500 24,375 19,500 10,500 $30,000 $40,000 $37,500 $50,000

Answer 1

Calculation of missing figures for Year 2 :

Retained Earnings = Total common equity - Common Stock = 37,500$ - 24,375$ = 13,125$

Total Current liabilities = Total debt - Long-term debt = 12,500$ - 9,375$ = 3,125$

Net plant and equipment = Total assets - Current assets = 50,000$ - 22,500$ = 27,500$

Cash and cash equivalents = Total current assets - Inventories - Accounts receivable = 22,500$ - 9,900$ - 3,375$ = 9,225$

Answer to Statements :

Statement #1 : Answer : False because Blue Hammer's total current assets actually increased from 18,000$ to 22,500$.

Reason : Liquid assets include cash and accounts receivables. Both of these balances have increased by a large portion from Year 1 to Year 2 and hence the liquidity of the company has actually increased rather than decreasing.

Statement #2 : Answer : True because Blue Hamster's retained earnings increased from Year 1 to Year 2

Reason : Retained earnings increased from 10,500$ to 13,125$ in Year 2, the difference between the 2 indicates the profit earned during the period.

Statement #3 : Answer : False because Common stockholders are treated as residual investors.

Reason : Common stockholders are always paid after debtholders and preferred stockholders. This is because it is always assumed common stock holders take the maximum risk in the company and hence their return is also unlimited unlike debtholders and preferred holders whose return is limited and hence common stockholders are also treated as residual investors.

Answer to last question in image :

US GAAP requires debt to be put in order of their maturity, i.e., the statement which is consistent with US GAAP in Blue hamster's balance sheet is that " The company's debts are listed in the order in which they are to be repaid".