Question

Financial Statements: Develop an Income Statement for 20XX, Cash Flow Statement for 20XX,
and Balance Sheet as of the end of 20XX based on the data provided below for year 20XX. All
sales are collected when the sale is made and all expenses are paid when the expense is
incurred. Explain the purpose of each financial statement.

a. Income Statement Data for 20XX:
 Units produced and sold = 420
 Sales ($80 per unit selling price) = $33600
 Cost of goods sold ($30 per unit, all variable costs) = $12600
 Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay
themselves)
 Advertising fees =$2000
 Bank fees = $150
 Phone/internet = $1200
 Shipping ($3 per unit) = $1260
 Utilities = $900
 Office supplies = $800
 Interest expense on note payable = $350
 Depreciation expense (straight line) = $800
 Income tax rate = 26 %

b. Other Financial Data for 20XX:
 Proceeds from sale of equipment = $3000. The equipment originally cost $1000
and had accumulated depreciation of $200.
 Purchase of equipment = $1600 (The machine is purchased on the last day of
20XX so no depreciation expense is recorded.)
 Repayment of note payable = $5000
 Consider any data relevant from the income statement.

c. Balance Sheet Data for Beginning of 20XX:
 Cash and cash equivalents = $10000
 Accounts receivable = $0 (Cash is received at time of sale)
 Raw materials inventory = $10500
 Equipment = $5000 (This includes the $1000 cost of the equipment sold in
20XX).
 Accumulated depreciation = $1,000 (This includes the accumulated depreciation
of 200 for the equipment sold in 20XX.
 Accounts payable = $0 (Cash is paid at the time of purchase.)
 Note payable = $5000 (This is the note payable which is repaid in 20XX)
 Common stock = $15000
 Retained earnings = $4500

2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.
a. Net Profit Margin
b. Quick Ratio
c. Debt-to-Equity Ratio

Answer 1

Income Statement for year 20XX

particulars	Amount
Sales	33600
less:Cost of goods sold	12600
Gross Profit	21000
Less operating and Administration expenses
Advertisement Expenses	2000
Bank Fees	150
Phone/Internet	1200
Shipping	1260
Utilities	900
Office Supplies	800
Depreciation	800
Total Admin/Operating Expenses	7110
Profit Before Tax and Interest	13890
Less:
Repayment of note payable	5000
Interest on notes payable	350
Profit Before Tax	8540
Less: Tax at 26%	2220
Net Profit	6320

Income statement helps us to ascertain profit obtained in business at different levels. For example, Gross profit is derived at after deducting direct material i.e purchases and direct labour from total sales.Net profit is derived after deducting administrative and operating expenses and interest expenses and tax from gross profit as shown above.

Cash flow Statement:

Particulars	Amount
Sales(CASH)	33600
Additions:
Sale of equipment(3000-800=2200)(cost-depreciation)	2200
Depreciation(since it is a non cash expenditure)	800
Deductions:
Repayment of note payable	5000
Purchase od Machine	1600
Rawmaterial(considering it to be purchased this year)	10500
Cash at the end of year	19500

A cash flow statement can be considered as the ststement that shows the source and application or use of cash in business.

Balance Sheet:

Liabilities	Amount	Assets	Amount
Common Stock(Shares)	15000	Cash	10000
Notes	5000	Raw materials	10500
Retained Earnings	4500	Equipments After Depreciation	4000
Total:	24500	Total:	24500

A Balance Sheet is a statement, not an account, Which shows the financial position of a business on a particular date.

2. Calculation of

a. Net Profit Margin or Net Profit Ratio(NP Ratio)

NP Ratio=Net Profit * 100/ Sales

=6320*100/33600

=19% approx.(percentage of profit over the sales)

b. Quick Ratio(QR)

QR= Cash+ Receivables/ Current Liabilities

=10000/5000

=2:1 (it should generally be greater than 1:1)

c. Debt to Equity Ratio

DE= Debt/ Equity

=5000/15000

=0.33.