A basic accounting equation is Assets less Liabilities equals Equity. The owners equity increases each year from 1999-2003. How is that possible when the assets for 2001 are down from the previous year? What other issues do you observe in regard to this information? What would you do if you do not have sufficient background to understand financial statements?

EXHIBIT 4.1 Arc Company, Inc. Financial Statements, Years Ended December 31, 1999-2003 (thousands of dollars) INCOME STATEMENT Net sales Cost of sales 1999 B000 B001 ROOR 2003 $211.2 $217.5 $203.4 $234.3 $256.2 135.0 145.2 135.3 145,8 162.3 $ 76.2 $72.3 $68.1 $88.5 $93.9 57.6 60.0 58.2 66.3 $ 18.6 $12,3 $9.9 $25.2 $27.6 1.2 0.9 0.6 0.6 0.9 $ 17.4 $11.4 $9.3 $24.6 63.3 $26.7 Gross margin Total expenses Net operating income Other expense net of other income Income before tax Federal, state, and local income taxes Net income Dividends-Preferred Dividends-Common Additions to retained earnings *Includes depreciation of 87 8.7 0.9 2.4 5.4 7.0 5.7 5.7 0.9 2.4 2.4 7.6 4.7 4.6 0.9 3.1 0.6 8.5 12.3 $ 12.3 $ 0.6 6.0 5.7 8.9 13.4 $133 0.6 6.0 6.7 10.2 BALANCE SHEET 33.6 Assets Current assets Cash $ 9.6 $ 10.2 $ 8.7 $ 7.8 $ 9.3 Marketable securities 1.5 1.8 3.6 3.6 3.0 Receivables 18.6 19.5 20.1 25.2 24.6 Inventories 40.2 38.1 40.8 44.1 Total current assets $ 63.3 $ 71.7 $ 70.5 $ 77.4 $ 81.0 Long-term investments 9.9 10.5 10.8 11.7 12.3 Property, plant, and equipment (net) 90.3 97.2 96.6 97.8 105.4 Other assets 3.3 2.7 2.4 2.1 2.7 Total assets $166.8 $182.1 $180.3 $189,0 $201.4 Liabilities & Owners' Equity Current liabilities Notes payable $ 1.5 $ 3.9 $ 8.7 $ 2.1 $ 1.2 Accounts payable 18.0 27.6 27.0 28.2 29.7 Accrued liabilities 3.0 4.2 3.9 4.5 5.4 Federal income tax 63 7.5 Total current liabilities $ 22.5 $ 35.7 39.6 $ 41.1 $ 43.8 30.6 Long-term debt 30.3 24.0 22.5 25.5 Total liabilities $ 53.1 $ 66.0 $ 63.6 $ 63.6 $ 69.3 18.0 Equity Preferred stock ($100 par value) Common stockt Paid-in-capital Retained earnings 30.0 18.0 30.0 3.0 62.7 $113.7 18.0 30.0 3.0 65.1 $16, 3.0 65.7 $116.7 12.0 37.5 4.5 71.4 $1254 12.0 37.5 4.5 781 $132.1 Total equity Forecasting, Budgeting. and Cash Management Total liabilities & owners' equity 11,000,000 shares 19992001; 1,250,000 shares 2002-03 $ 166,8 $182.1 $180.3 $189.0 $201.4 77