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. Cute Camel Woodcraft Company 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. Cute Camel Woodcraft Company 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 $6,919    $5,535 Accounts payable $0 $0 Accounts receivable 2,531 2,025 Accruals 352 0 Inventories 7,425 5,940 Notes payable 1,992 1,875 Total current assets $16,875 $13,500 Total current liabilities $2,344    $1,875 Net fixed assets: Long-term debt 7,031 5,625 Net plant and equipment $20,625    $16,500 Total debt $9,375 $7,500 Common equity: Common stock 18,281 14,625 Retained earnings 9,844    7,875 Total common equity $28,125 $22,500 Total assets $37,500 $30,000 Total liabilities and equity $37,500 $30,000 Given the information in the preceding balance sheet—and assuming that Cute Camel Woodcraft Company 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: Cute Camel’s net collection of inventory items increased by more than the firm's sales between Years 1 and 2. This statement is incorrect   , because: Total inventories of raw materials, work-in-process, and final goods decreased by $1,485 million between Year 1 and Year 2 Total inventories of raw materials, work-in-process, and final goods increased from $5,940 million to $7,425 million between Year 1 and Year 2 The accruals balance decreased by $352 million between Years 1 and 2 Statement #2: Over the past two years, Cute Camel Woodcraft Company has relied more on the use of short-term debt than on long-term debt financing. This statement is     , because: 1.)Cute Camel’s total current liabilities increased by $469 million, while its use of long-term debt increased by $1,406 million 2.)Cute Camel’s total notes payable increased by $117 million, while its common stock account increased by $3,656 million 3.)Cute Camel’s total current liabilities decreased by $469 million, while its long-term debt account decreased by $1,406 million Statement #3: The book value per share of Cute Camel’s stock in Year 2 was $562.50. This statement is     , because: 1.)The per-share book value is calculated by dividing the company’s total debt by the number of outstanding shares of common stock 2.)The per-share book value is calculated by dividing the company’s total assets by the number of outstanding shares of common stock 3.)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, which statement regarding Cute Camel Woodcraft Company’s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)? 1.)The company’s debts should be listed in order of their liquidity. 2.)The company’s debts are listed in the order in which they are to be repaid. 3.)The company’s debts should be listed from those carrying the largest balance to those with the smallest balance.

Answer 1

Statement 1 : true

Total inventories of raw materials, work-in-process, and final goods increased from $5,940 million to $7,425 million between Year 1 and Year 2. This can be seen in the "inventory" line item on the assets side of the balance sheet

The accruals balance increased from Year 1 to Year 2

Statement 2 : false

Cute Camel’s total current liabilities increased by $469 million, while its use of long-term debt increased by $1,406 million

Statement 3 :true

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

As per GAAP, the company’s debts should be listed in the order of their liquidity