Question

12/31/17 Balance Sheet

Cash $17,000

                                    Accounts Receivable                           $12,000

                                    Prepaid Insurance                                $5,000

                                    Inventory                                             $15,000

Total $49,000

                                    Equipment                                           $100,000

                                    Accumulated Depreciation                  $(20,000)

Total $80,000

                                    Total Assets                                        $129,000

                                    Accounts Payable                                $9,000

                                    Income Taxes Payable $3,000

                                    Total Liabilities                                    $12,000

                                    Common Stock                                   $100,000

                                    Retained Earnings                               $17,000

                                    Total Equity                                         $117,000

                                    Total Liabilities & Equity                    $129,000

Additional Information:

Sales for 2018 are expected to be $200,000.

Accounts Receivable turnover is expected to be 12 times - 30 days of sales in accounts receivable out of a 360 day year (1/12 of annual sales). This would be used to get ending accounts receivable on the 2018 balance sheet – day’s sales in accounts receivable is ending accounts receivable divided by average sales (sales for 2018 divided by 360 days). We can “back into” ending accounts receivables once we have estimated sales. Note that the turnover ratio changes so the turnover ratio at the end of 2017 may have been different than that expected at the end of 2018.

Gross Margin ratio is expected to be 40 percent.

Inventory Turnover is expected to be 12 times - 30 days of cost of sales in ending inventory out of a 360 day year (based upon cost of goods sold and ending 2018 inventory). This would be used to get inventory on the 2018 balance sheet. See accounts receivable above for similar computations.

The cost of ending inventory is expected to be paid next month – ending accounts payable will be same as ending inventory.   Or, to state in another way, accounts payable turnover is same as the inventory turnover. The assumption is that only inventory purchases flow through accounts payable – the assumption actually used by most manufacturing/merchandising companies when prepared the statement of cash flows.

Equipment was purchased on 1/1/18 for $20,000. Equipment has a five year life, no salvage value, and is depreciated using the straight-line method. The old equipment is being depreciated on the same basis.

Salaries are expected to be $2,000 per month. It is expected that one-half month will be owed on 12/31/18 because of when payday falls.

$30,000 in cash was borrowed on 12/31/18 by issuing a Note Payable.

Insurance costing $18,000 was purchased on 6/1/18 (the same time in which the policy purchased in 2017 expired - the new policy was for 12 months).

The tax rate is 30 percent. Income taxes for the current year are payable during the first two months of the next year.

Dividends of $2,000 were paid during 2018.

I've started the income statement, just want to make sure I'm on the right track to keep on going.

I need an income statement, statement of retained earnings, balance sheet(12/31/17 & 12/31/18) and statement of cash flow (direct method)

Answer 1

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Income Statement:
Sales			200000
Less: Cost of Goods Sold	(100%-40%)		120000
Gross Margin	40%		80000
Less: Operating Expense
Depeciation Epense	Old		20000
	New	20000/5	4000
Salaries Expense		2000*12	24000
Insurance Expense	Old Policy		5000
	New Policy	18000/12*7	10500
Income Before Tax			16500
Less: Taxation	30%		4950
Net Income			11550
Statement of Retained Earning:
Beginning Balance	17000
Add: Net Income	11550
Less: Dividend	2000
Ending Balance	26550
Balance Sheet:
	Beginning	Working	Ending
Cash	17000	Working Below	62333
Accounts Receivable	12000	200000/12	16667
Prepaid Insurance	5000	18000*5/12	7500
Inventory	15000	120000/12	10000
Total	49000		96500
Equipment	100000	100000+20000	120000
Acc Depreciation	-20000	20000+4000+20000	-44000
Total	80000		76000
Total Assets	129000		172500	0
Accounts Payable	9000	Same as inventory	10000
Note Payable	0		30000
Salaries Payable	0	2000/2	1000
Income Tax Payable	3000	From Income Stat	4950
Total Liabilities	12000		45950
Common Stock	100000		100000
Retained Earning	17000	From Ret Earning	26550
Total Equity	117000		126550
Total Equity and Liabilities	129000		172500
Working-1
Beginning Cash	17000
Collection from Customers	195333	12000+200000-16667
Note Payable Borrowing	30000
Payment for Insurance	-18000
Payment of Payables	-114000	(9000+115000Purchases-10000)
Equipment Pur	-20000
Income Tax Payment	-3000
Salaries Payment	-23000	24000-1000
Dividend Payment	-2000
Ending Cash	62333
COGS	120000
Less:Beginning	15000
add: Ending	10000
Purchase	115000
Statement of Cash Flow:
Cash flow from operating activities:
Cash received from Customers	195333
Cash paid for merchandise	-114000
Cash paid for Salaries	-23000
Cash Paid for Income Tax	-3000
Cash paid for Insurance	-18000
Net Cash provided by Operating Activities	37333
Cash flow from investing activities:
Purchase of Equipment	-20000
Net Cash used by Investing Activities	-20000
Cash flow from Financing activities:
Borrowing	30000
Dividend Paid	-2000
Net Cash used by Financing Activities	28000
Net Increase or (Decrease) in Cash	45333
Add: Beginning Balance	17000
Ending Balance	62333