Question

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.

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.

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     , because:

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

Cold Goose’s total current liabilities balance increased from $1,688 million to $2,109 million between Year 1 and Year 2

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

This statement is     , because:

The cash and equivalents account increased between Years 1 and 2

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

Answer 1

A balance sheet always tallies

Net Plant and Equipment in Year 2 = 31250-14062 = $17188

Cash and Equivalents = 14062 – 6187-2109 = $5766

Total Current liabilities = 0+293+1660 = $1953

Retained earnings = 23438-15235 = $8203

Statement 1 is false

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

Statement 2 is TRUE

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