Chapter 4, Problem 4.18BYP

To determine

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

To Prepare: The balance sheet and income statement of Corporation C.

Explanation of Solution

Prepare the balance sheet for Corporation C.

Corporation C
Balance sheet
Assets	Amount($)	Amount($)
Cash	15,000
accounts receivable(net) (5)	12,000
Inventory (4)	30,000
prepaid expenses and other current assets (9)	3,000
current assets (8)		60,000
property, plant and equipment(net) (10)		140,000
Total assets (2)		200,000
Liabilities and shareholders' equity
accounts payable (7)	25,000
short term notes	5,000
current liabilities (6)		30,000
bonds payable (12)		20,000
shareholders' equity (11)		150,000
Total liabilities and shareholders’ equity (2)		200,000

Table (1)

Prepare the income statement for Corporation C:

Corporation C
Income statement
Particulars	Amount($)	Amount($)
Sales (1)	300,000
less: cost of goods sold (3)	(180,000)
gross profit (3)		120,000
operating expenses (15)		(96,000)
interest expense (13)		(2,000)
tax expense (14)		(7,000)
Net income		15,000

Table (2)

Working notes:

$\begin{array}{c}\text{Profit margin on sales = }\frac{\text{Net income}}{\text{Sales}}=5\%\\ \text{Sales=}\frac{\$15}{5\%}\\ =\$300,000\end{array}$ (1)

$\begin{array}{c}\text{Return on assets = }\frac{\text{Net income}}{\text{Total assets}}=7.5\%\\ \text{Total assets= }\frac{\$15}{7.5\%}\\ =\$200,000\end{array}$ (2)

$\begin{array}{c}\text{Gross profit margin =}\frac{\text{Gross profit}}{\text{Sales}}=40\%\\ \text{Gross profit=}\frac{\$300,000}{40\%}\\ =\$120,000\\ \text{Cost of goods sold =Sales}-\text{Gross profit}\\ \text{=\$300,000}-\$120,000\\ =\$180,000\end{array}$ (3)

$\begin{array}{c}\text{Inventory turnover ratio =}\frac{\text{Cost of goods sold}}{\text{Inventory}}=6\\ \text{Inventory=}\frac{\$180,000}{6}\\ =\$30,000\\ \end{array}$ (4)

$\begin{array}{c}\text{Receivables turnover ratio = }\frac{\text{Sales}}{\text{Accounts receivable}}=25\\ \text{Accounts receivable=}\frac{\$300,000}{25}\\ =\$12,000\end{array}$ (5)

$\begin{array}{c}\text{Acid-test ratio=}\left[\frac{\begin{array}{l}\text{Cash+Accounts receivable}\\ \text{+short term investments}\end{array}}{\text{Current liabilities}}\right]=.9\\ \text{Current liabilities=}\frac{\$15,000+\$12,000+0}{.9}\\ =\$30,000\end{array}$ (6)

$\begin{array}{c}\text{Accounts payable = Current liabilities}-\text{Short term notes}\\ \text{=\$30,000}-\$5,000\\ =\$25,000\end{array}$ (7)

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}=2\\ \text{Current assets=\$30,000}\times \text{\$2,000}\\ \text{=\$60,000}\end{array}$ (8)

$\begin{array}{c}\text{Prepaid expenses and other current assets=}\left[\begin{array}{l}\text{Current assets}-(\text{Cash+}\\ \text{Accounts receivable+Inventory)}\end{array}\right]\\ =\left[\begin{array}{l}\$60,000-(\$15,000+\\ \$12,000+\$30,000\end{array}\right]\\ =\$3,000\end{array}$ (9)

$\begin{array}{c}\text{Property, plant and equipment=Total assets}-\text{Current assets}\\ \text{=\$200,000}-\$60,000\\ =\$140,000\end{array}$ (10)

$\begin{array}{c}\text{Return on shareholders' equity=}\frac{\text{Net income}}{\text{Shareholders' equity}}=10\%\\ \text{Shareholders' equity}=\frac{\$15,000}{10\%}\\ =\$150,000\end{array}$ (11)

$\begin{array}{c}\text{Debt to equity ratio= }\frac{\text{Total liabilities}}{\text{Shareholders' equity}}=1÷3\\ \text{Total liabilities=\$150}\times \text{1}÷\text{3}\\ \text{=\$50,000}\\ \text{Bonds payable =Total liabilities}-\text{Current liabilities}\\ \text{=\$50,000}-\$30,000\\ =\$20,000\end{array}$ (12)

$\begin{array}{c}\text{Interest expense= 8\%}\times \text{(Short-term notes+Bonds)}\\ \text{=8\%}\times \text{(\$5,000+\$20,000)}\\ \text{=\$2,000}\end{array}$ (13)

$\begin{array}{c}\text{Times interest earned ratio=}\frac{(\text{Net income+ Interest +taxes)}}{\text{Interest}}=12\\ =\frac{(\$15,000+\$2,000+\text{Taxes)}}{2}\\ =\$12,000\\ \text{Times interest earned ratio=(\$15,000+\$2,000+Taxes)=\$24,000}\\ \text{Tax expense=\$24,000}-(15,000+2,000)\\ =\$7,000\end{array}$ (14)

$\begin{array}{c}\text{Operating expenses=}\left[\begin{array}{l}\text{(Sales}-\text{Cost of goods sold}-\text{Interest expense}\\ -\text{Tax expense)}-\text{Net income}\end{array}\right]\\ =(\$300,000-\$180,000-\$2,000-\$7000)-\$15,000\\ =\$96,000\end{array}$ (15)