INTERPRETING FINANCIAL STATEMENTS Chieftain International, Inc., is an oil and n

Question

INTERPRETING FINANCIAL STATEMENTS Chieftain International, Inc., is an oil and natural gas exploration and production company. A recent balance sheet reported $208 million in assets with only $4.6 million in liabilities, all of which were short-term accounts payable. During the year, Chieftain expanded its holdings of oil and gas rights, drilled 37 new wells, and invested in expensive 3-D seismic technology. The company generated $19 million cash from operating activities and paid no dividends. It had a cash balance of $102 million at the end of the year. Instructions Name at least two advantages to Chieftain from having no long-term debt. Can you think of disadvantages ? What are some of the advantages to Chieftain from having this large a cash balance? What is a disadvantage? Why do you suppose Chieftain has the $4.6 million balance in accounts payable, since it appears that it could have made all its purchases for cash?

Explanation / Answer

Question 1

Benefits of having no long debts:

Disadvantage of not having long term debts:

Question 2

Advantages of large cash balance:

Disadvantage of large cash balance”

Question 3

Company keeps the amount as short term debt so that it can take an advantage of the days it can delay the cash payment till maturity. This can help company to take advantage of some more opportunities which can help the company to earn extra. Say if the company does not have any accounts payable it means the company might lose the opportunities if in case the accounts payable were there and there would be extra cash in hand.

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