Question

In reviewing the balance sheet of an unknown company, which item would you look for to determine whether or not the unknown company is a manufacturing company?

A) Cash
B) Accounts receivable
C) Inventory
D) Accounts payable

Answer 1

To identify a manufacturing company from a balance sheet, you should look for a large inventory amount which indicates the production of goods. Items like cash, accounts receivable, and accounts payable are common to all businesses and do not specify a manufacturing process.

Step-by-step explanation:

To determine whether an unknown company is a manufacturing company by reviewing its balance sheet, you should look for a large inventory line item. Manufacturing companies typically have significant amounts of raw materials, work-in-progress, and finished goods as part of their operating cycle. For non-manufacturing businesses, inventory may either be a minimal part of their assets or not applicable at all.

While other items like cash, accounts receivable, and accounts payable are important, they do not specifically indicate a manufacturing process. They are common to all types of companies. Therefore, the presence and size of the inventory item on the balance sheet can be a clear sign that the company engages in manufacturing products.

Considering the banking balance sheet specifics, such as cash in vaults or monies held at the Federal Reserve, they reflect a banking institution rather than a manufacturing entity. Since our focus is on identifying a manufacturing company, these elements of a bank's assets and liabilities would not be helpful in this case.