The balance sheet provides a snapshot of the financial condition of a company. I

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 sheet. Blue Hamster Manufacturing Inc. Balance Sheet for Year Ending December 31 (Millions of Dollars) Year 2 Year 1 Year 2 Year 1 Liabilities and equity Current liabilities: Assets Current assets: $0 188 1,062 $0 Cash and equivalents Accounts receivable Inventories $2,952 Accounts payable 1,350 3,960 $9,000 1,080 3,168 $7,200 Accruals 1,000 $1,000 3,000 $4,000 Notes payable Total current assets Total current liabilities Net fixed assets Long-term debt 3,750 Net plant and equipment $8,800 Total debt $5,000 Common equity: 7,800 4,200 $12,000 $16,000 Common stock 9,750 Retained earnings $15,000 $20,000 Total common equity Total assets $20,000 $16,000 abilities and equity 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.

Explanation / Answer

1) Liquid Assets are cash and cash equivalents. Liquid assets for Year 1 are $2,952 million. For Year 2 they are -

Liquid Assets (Year 2) = $9,000 - $3,960 - $1,350 = $3,690

We can see that the Liquid assets have actually increased. Therefore, given statement is False and option 2 is correcct.

2) This statement is also False as the long term debt of the company increased by $750 million which is more than the short term debt or total current liabilities which increased by $250 million (1062 + 188 - 1000).

3) The given statement is False as the common shareholders are treated as residual investors and are paid in the last.

4) The balance sheet of the company has listed debts in order of their liquidity as current liabilities are listed first and then come the long term debts.

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