Question

- 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 %

- 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.

- 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

Use the above info to answer the following questions.

Question 1: Calculate the following financial ratios and explain the meaning of the results.

Net Profit Margin

Quick Ratio

Debt-to-Equity Ratio

Question 2. 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. (Please show excel formula)

Answer 1

INCOME STATEMENT FOR 20XX

Particulars	Amount
Sales	33,600
Cost of Goods Sold	(12,600)
Gross Margin	21,000
Advertising fees	(2,000)
Bank fees	(150)
Phone/internet	(1,200)
Shipping	(1,260)
Utilities	(900)
Office supplies	(800)
Interest expense on notes payable	(350)
Depreciation expense	(800)
Profit on sale of machinery	2,200
Net Profit before tax	15,740
Tax @ 26%	(4,092.40)
Net Profit after tax	11,647.60

BALANCE SHEET AS OF THE END OF 20XX

Particulars	Amount
Assets
Cash and Cash Equivalents	27,147.60
Equipment	4,000
	31,147.60
Equity & liabilities
Common Stock	15,000
Retained Earnings (4,500+11,647.60)	16,147.60
	31,147.60

CASH FLOW STATEMENT

Particulars	Amount
1. Cash Flow from Operating Activity
Net Profit before tax	15,740
Add: Non Cash and non operatig expenses
Depreciation	800
Interest expense on note payable	350
Less: Non operating income
Profit on sale of asset	(2,200)
Operating profit before working capital changes	14,690
Add: Decrease in inventory	10,500
Cash flow from operations	25,190
Less: Tax paid	(4,092.4)
Cash flow from operating activity (A)	21,097.60
2. Cash Flow from Investing activity
Purchase of equipment	(1,600)
Proceeds from sale of equipment	3,000
Cash flow from investing activity (B)	1,400
3. Cash flow from Financing Activity
Repayment of notes payable	(5,000)
Interest expense on note payable	(350)
Cash used in financing activity (C)	(5,350)
Net increase in cash and cash equivalents (A+B+C)	17,147.60
Cash and cash equivalents at the beginning	10,000
Cash and cash equivalents at the end	27,147.60

1. Net Profit Ratio = Net Profit after tax/ Sales*100

=11,647.60/33,600*100 = 34.67%

This ratio depicts remaining profit after all cost of production, financing and administrating cost deducted from sales. The ratio of 34.67% depicts company after recognising all its expenses has earned a profit of 34.67% on its sales

2. Quick Ratio = Quick asset (Cash and cash equivalents)/ Current liabilities

=27147.60/0 = Infinity

This ratio depicts company's ability to pay its short term liabilities. Since company is not having any current liability therefore the ratio is infinity

3. Debt-to-equity ratio = Debt/ Equity

=0/31,147.60 = 0

This ratio depicts relation between capital contributed by creditors and capital contributed by shareholders. Since company has no capital contributed by creditors therefore th eration is 0 which means hole capital is contributed by shareholder's only.

Note:

1. Profit on sale of asset

Cost = 1,000

Acc. Dep. = 200

Book value = 800

Sale Price = 3000

Profit = 2,200

2. Closing book value of equipment

Closing cost of quipment= Opening balance + Purchase +sale

=5,000+1,600-1,000 = 5,600

Depreciation during the year = 800

Acc. Dep closing balance = Opening + Depreciation charged- Depreciation on asset sold

=1,000+800-200 = 1,600

Closing book value of equipment= 5,600-1,600 = 4,000

3. It has been assumed opening stock of raw material inventory has been used for the production of units during the year and only the excess inventory required for production was purchased. Hence the closing is NIL