Question

DietWeb, Inc.
BALANCE SHEET
December 31, 20X8 and 20X7
(in thousands)
	20X8	20X7
Assets
Current assets
Cash and cash equivalents	$3,019	$1,050
Trade receivables	485	450
Prepaid advertising expenses	59	609
Prepaid expenses and other current assets	175	230
Total current assets	3,738	2,339
Fixed assets, net	3,321	3,926
Total assets	$7,059	$6,265
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$1,070	$ 909
Current maturities of notes payable	42	316
Deferred revenue	1,973	1,396
Other current liabilities	171	12
Total current liabilities	3,256	2,633
Long-term debt, less current maturity	34	176
Accrued liabilities	792	690
Deferred tax liability	15	145
Total liabilities	4,097	3,644
Shareholders' equity
Common stock	6,040	4,854
Retained earnings	(3,078)	(2,233)
Total shareholders' equity	2,962	2,621
Total liabilities plus shareholders' equity	$7,059	$6,265

DietWeb, Inc.
INCOME STATEMENT
Two Years Ended December 31, 20X8 and 20X7
(in thousands)
	20X8	20X7
Revenue	$19,166	$14,814
Costs and expenses
Cost of revenue	2,326	1,528
Product development	725	653
Sales and marketing	13,903	8,710
General and administrative	2,531	2,575
Interest Expense	13	22
Depreciation and amortization	629	661
Impairment of intangible assets	35	--
Total costs and expenses	20,162	14,149
Net income before taxes	(970)	665
Income tax benefit	129	125
Net income (loss)	$ (841)	$ 790

DietWeb, Inc.
STATEMENT OF CASH FLOWS
Year Ended December 31, 20X8
	20X8	20X7
Cash flows from operations
Net income (loss)	$(841)	790
Adjustments to net income
Depreciation	629	660
Increase in receivables	(35)	(47)
Decrease (Increase) in prepaid advertising	550	(650)
Decrease in other current assets	55	74
Increase (Decrease) in accounts payable	161	(540)
Increase in accrued liabilities	102	43
Increase (Decrease) in deferred revenue	432	(665)
Increase in common stock issued	1,186	--
Increase in other current liabilities	159	43
Net cash provided (used) by operations	2,372	(292)
Cash flows from operations
Purchase of property and equipment	(320)	2,016
Cash flows from financing activities
New debt	613	40
Debt payments	(718)	(918)
Net cash provided (used) by financing activities	(105)	(878)
Net increase in cash and cash equivalents	$1,947	846
Cash and equivalents at beginning of year	$1,072	204
Cash and equivalents at end of year	$3,019	1050

1-REVENUE/SALES- Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. (Revenues were 20x6: $11,814 20x5: $9,500, 20x4: $7,800) (Industry sales have been increasing by double digits for the last five years, competitor sales increases have ranges from 10-30% increases year over year for the last 5 years.) Using a reasonableness analytic estimate expected revenue for 2018 using the historical data provided.

2.Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's Long-term debt, less current maturity for 20X8 was approximately 11 percent. She is aware that the company pays little to no interest on the current portion of the long-term debt. Long-term debt, less current maturity is the company’s only debt, and source of interest expense. Using a reasonableness analytic estimate expected interest expense for 20X8. (Show your calculation, your answer, and if any differences noted are material or not, conclude whether you believe this account is misstated or appears reasonable.)

Answer 1

Growth for last three years based on the information provided

Average growth rate = 23.8% in last three years.

Hence, considering this historical trend and industry competitors are growing in the range of 10-30%,

And on conservative basis applying average of historical growth rate, Revenue for 2018 would be

= 14814*23.8% = 18346.96 (in '000s)

Also, we can see that growth rate has been increasing each year by 1-3%, hence, if add 3 percantage points to growth rate of 2017, then the revenue of 19166 mentioned in the question is reasonable (19166 representts growth rate of 29.4%)

Answer for 2

Long term debt excluing current maturites in 2017 = $176,000

Now applying 11% rate of interest on $176,000, we get expected interest payment as 11%*176,000

= $19,360

This amount is less than the amount mentioned ($22,000) in the P&L statement

Here, we have used $176,000 for calculation of interest since thats the value of debt at the year end and interest on the same will be paid for the next year