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.

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
Assets			Liabilities and equity
Current assets:			Current liabilities:
Cash and equivalents		$55,350	Accounts payable	$0	$0
Accounts receivable	$25,312	$20,250	Accruals	$3,516	$0
Inventories	$74,250	$59,400	Notes payable	$19,921	$18,750
Total current assets	$168,750	$135,000	Total current liabilities		$18,750
Net fixed assets:			Long-term debt	$70,312	$56,250
Net plant and equipment		$165,000	Total debt	$93,750	$75,000
			Common equity:
			Common stock	$182,812	$146,250
			Retained earnings		$78,750
			Total common equity	$281,250	$225,000
Total assets	$375,000	$300,000	Total liabilities and equity	$375,000	$300,000

Given the information in the preceding balance sheet—and assuming that Blue Hamster Manufacturing 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.

Statement #1: Blue Hamster’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   , because:

Blue Hamster’s total current liabilities balance decreased by $33,750 between Year 1 and Year 2.

Blue Hamster’s total current liabilities balance increased from $20,250 to $25,312 between Year 1 and Year 2.

Blue Hamster’s total current asset balance actually increased from $135,000 to $168,750 between Year 1 and Year 2.

Blue Hamster’s total current asset balance decreased from $168,750 to $135,000 between Year 1 and Year 2.

Statement #2: In Year 2, Blue Hamster Manufacturing Inc. was profitable.

This statement is   , because:

Blue Hamster’s retained earnings account increased between the end of Years 1 and 2.

The cash and equivalents account increased between Years 1 and 2.

Blue Hamster’s total assets increased between Years 1 and 2.

Statement #3: The book value per share of Blue Hamster’s stock in Year 2 was $5,625.

This statement is   , because:

The per-share book value is calculated by dividing the company’s total assets by the number of outstanding shares of common stock.

The per-share book value is calculated by dividing the company’s total debt by the number of outstanding shares of common stock.

The per-share book value is calculated by dividing the company’s total common equity by the number of outstanding shares of common stock.

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.

Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Blue Hamster Manufacturing Inc.’s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company’s assets should be listed in alphabetical order.

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

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

Answer 1

As per rules I am answering the first 4 subparts of the question

1: This statement is FALSE because

Blue Hamster’s total current asset balance actually increased from $135,000 to $168,750 between Year 1 and Year 2.

(Liquid assets are the current assets of the business)

2: This statement is TRUE because

Blue Hamster’s retained earnings account increased between the end of Years 1 and 2.

Retained earnings = Total common equity- common stock

= 281250-182812

=98438

Increase in retained earnings is due to increase in profits of the business.

3: The statement is TRUE because

The per-share book value is calculated by dividing the company’s total common equity by the number of outstanding shares of common stock.

Per share value = Total equity/ number of shares

= 281250/50

=5625

4: Increase

If new equity is issued the inflow will be in the form of cash and so the cash equivalents increase.