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 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 sheets for Blue Hamster Manufacturing Inc. for the years ending December 31, Year 2 and 1, respectively. Blue Hamster Manufacturing Inc. Balance Sheet For the Year ended December 31 Year 2 Year 1 Year 2 Year 1 Liabilities and equity Assets Current assets Cash and equivalents Accounts receivable Inventories Total current assets Net fixed assets: Net plant and equipment Current liabilities $0 $5,859 $33,203 $92,250 Accounts payable $33,750 Accruals $99,000 Notes payable $225,000 Total current liabilities $0 $0 $31,250 $31,250 $93,750 $125,000 $42,188 $123,750 $281,250 Long-term debt $117,188 $275,000 Total debt $156,250 Common equity: Common stock Retained earnings Total common equity Total liabilities and equity $304,688 $243,750 $%131,250 $375,000 $500,000 $468,750 Total assets $625,000 $500,000 $625,000

Answer 1

1) Statement 1 is False because

Accruals actually increased from $0 in year 1 to $5859 at the end of year 2

All other statements are false as can be verified from the given balance sheet

2) Statement 2 is True because

The funds recorded in Blue Hamster’s cash and equivalents account represents funds that are either cash or can be converted into cash almost immediately

Cash and cash equivalents in year 2 = total current assets in year 2 – accounts receivable in year 2 – inventory in year 2 = 281250 – 42188-123750 = $115,312

Thus Net Plant & equipment in year 2 = Total assets in year 2 – total current assets in year 2

= 625000-281250 = $343,750

3) Statement 3 is True because

Change in accounts receivable from year 1 to year 2 = accounts receivable in year 2 – accounts receivable in year 1 = 42,188-33,750 = $8438

The $8438 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.

4) As per U.S. GAAP and from the given balance sheet:

The company’s assets should be listed in the order in which they are to be converted into cash.

Total current liabilities in year 2 = accounts payable in year 2 + accruals in year 2 + Notes payable in year 2 = 0 + 5859 + 33203 = $39062

Retained earnings in year 2 = total common equity in year 2 – common stock in year 2 = 468750 – 304688 = $164,062