Question

Question 1: The following information and ratios of XYZ Ltd related to the year ended December 31, 2019. 1. Accounting Information Gross Profit 15% of Sales Net profit 8% of Sales Inventory to sales 5% Average collection Period 60days All Sales on Credit 2. Financial Ratios Fixed Assets to Sales 33.3% Fixed Assets to Current Assets 118% Current ratio 2x Long-term loans to current liabilities 67% Capital to Retained earnings 25% If the value of fixed assets as of December 31, 2019 amounted to $2,600,000, prepare a summarized income statement for the year ended December 31, 2019 and Balance sheet as of December 31, 2019.

Answer 1

Solution

Calculation made as follows on the basis of information furnished,
1. Fixed Assets to Sales = 33.3%
or, Fixed Assets / Sales = 0.333
or, 2600000 / Sales = 0.333 (as Fixed Assets = 2600000)
or, Sales = 2600000 / 0.333
or, Sales = 7807808 (Approx.)

2. Fixed Assets to Current Assets = 118%
or, Fixed Assets / Current Assets = 1.18
or, 2600000 / Current Assets = 1.18
or, Current Assets = 2600000 / 1.18
or, Current Assets = 2203390 (Approx.)

3. Current ratio = 2
or, Current Assets / Current Liabilities = 2
or, 2203390 / Current Liabilities = 2
or, Current Liabilites = 2203390 / 2
or, Current Liabilites = 1101695

4. Long-term loans to current liabilities = 67%
or, Long-term Loans / Current Liabilities = 0.67
or, Long-term Loans / 1101695 = 0.67
or, Long-term Loans = 1101695 * 0.67
or, Long-term Loans = 738136 (Approx.)

5. Gross Profit 15% of Sales
Therefore, Gross Profit = 15% * 7807808
Gross Profit = 1171171 (Approx.)

6. Net profit 8% of Sales
Therefore, Net Profit = 8% * 7807808
Net Profit = 624625 (Approx.)

7. Inventory to Sales = 5%
or, Inventory = 5% * 7807808
or, Inventory = 390390 (Approx.)

8. Average collection Period = 60 Days
or, (Accounts Receivable / Sales) * 365 = 60
or, (Accounts Receivable / 7807808) = 60 / 365
or, Accounts Receivable / 7807808 = 0.1644 (Approx.)
or, Accounts Receivable = 7807808 * 0.1644
or, Accounts Receivable = 1283604 (Approx.)

9. Capital to Retained earnings = 25%
or, Capital / Retained earnings = 25%
or, Retained Earnings = Capital / 0.25
Therefore, Total Stockholders' Equity = Capital + Reserves
or, 2963559 = Capital + (Capital / 0.25)
or, 2963559 = (1.25 * Capital) / 0.25
or, (2963559 * 0.25) / 1.25 = Capital
or, Capital = 592712

Now, let us prepare the Income Statement as follows,

Sales	7,807,808
Less: Cost of Goods Sold (Balancing Figure)	(6,636,637)
Gross Profit	1,171,171
Less: Depreciation, Interest & Tax Expenses (Balancing Figure)	(546,546)
Net Income	624,625

Now, as we have done with the Income Statement, let us prepare the Balance Sheet as follows,

ASSETS
Current Assets
Accounts Receivable	1283604
Inventories	390390
Other Current Assets (Balancing Figure)	529396
Total Current Assets	2203390
Non-Current Assets
Plant, Property and Equipment - Net	2600000
Total Non-Current Assets	2600000
Total Assets	4803390
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Other Current Liabilities	1101695
Total Current Liabilities	1101695
Non-Current Liabilities
Long-term Loans	738136
Total Non-Current Liabilities	738136
Total Liabilities	1839831
STOCKHOLDERS' EQUITY
Common Stock	592712
Retained Earnings (Balancing Figure)	2370847
Total Stockholders' Equity	2963559
Total Liabilities & Stockholders' Equity	4803390