Interpreting Financial Statements: Shareholders’ Equity
Consider Sigma Designs’ balance sheets for 1995 and 1994 (dollars in thousands). Sigma Designs is a high tech software development company specializing in imaging and multimedia computer applications.
|
1995 |
1994 |
|
|
Assets |
||
|
Cash and equivalents |
$ 881 |
$ 1,808 |
|
Marketable securities |
7,349 |
3,514 |
|
Accounts receivable, net of allowances |
11,958 |
7,246 |
|
Inventories |
9,736 |
10,602 |
|
Prepaid expenses and other |
1,086 |
569 |
|
Total current assets |
31,010 |
23,739 |
|
Equipment, net |
1,343 |
1,200 |
|
Other assets |
1,034 |
1,700 |
|
Total assets |
$33,387 |
$26,639 |
|
Liabilities and Shareholders’ Equity |
||
|
Current Liabilities |
||
|
Bank lines of credit |
$ 1,710 |
$ 0 |
|
Accounts payable |
9,333 |
4,207 |
|
Accrued salary and benefits |
1,748 |
2,313 |
|
Other accrued liabilities |
773 |
2,102 |
|
Total current liabilities |
13,564 |
8,622 |
|
Long term liabilities |
1,102 |
1,518 |
|
Shareholders’ Equity |
||
|
Common stock |
38,820 |
27,544 |
|
Retained earnings (Deficit) |
(20,099) |
(11,045) |
|
Shareholders’ equity |
18,721 |
16,499 |
|
Total liabilities and shareholders’ equity |
$33,387 |
$26,639 |
Required
a. Concentrate on the equity section of the balance sheet. What major changes have occurred in this section? What may have caused these changes?
b. Because Sigma had a net loss each year, its return on equity (ROE) ratios were negative each year. What aspects of Sigma’s shareholders’ equity would concern investors? Why?