Question

Green Caterpillar Garden Supplies Inc.

Balance sheet for year ending December 31 ($ million)
Current assets: Year 1 Year 2
Cash and equivalent 1384 1107
Account receivable 504 405
Inventories 1485 1188
Total Current assets 3375 2700
Net fixed assets
Net plant & equipment 4125 3300
Total assets 7500 6000

Liabilities and equity
Current liabilities:
Account payable 0 0
Accruals 70 0
Notes payable 399 375
Long term debt 1406 1125
Total debt 1875 1500
Common equity
Common stock 3656 2925
Retained earning 1969 1575
Total common equity 5625 4500
Total liabilities & equity 7500 6000


Statement #2: In Year 2, Green Caterpillar Garden Supplies Inc. was profitable. This statement is ____, because:
(A) Green Caterpillar’s total assets increased between Years 1 and 2.
(B) The cash and equivalents account increased between Years 1 and 2.
(C) Green Caterpillar’s retained earnings account increased between the end of Years 1 and 2.

Answer 1

This statement is TRUE, because:

C) Green Caterpillar’s retained earnings account increased between the end of Years 1 and 2.

Step-by-step explanation:

The only way to determine if a company was profitable is through the Net Profit in the Income Statement , if it was profitable it means that the result were allocated in Retained Earnings in the Balance Sheets because this account only growth with the results of the income statement, in this case the increase in the account was for $394.

Option A) is not true because the increase in total assets not only means a company´s positive results it could be because of the company increment the Accounts Receivable term and the Inventories which no means a positive result.

Option (B) in the case of cash increases it could be due to an increase in the total debt of the company as it's indicated in the Long Term Debt and because of new stock issues.

Both of this option are complementary to the option selected but this options alone doesn't indicate a profitabilty year.