How do I create a balance sheet and income statement using the below ratio infor
ID: 2454798 • Letter: H
Question
How do I create a balance sheet and income statement using the below ratio information?
Profit margin on sales = 5%
Return on assets = 7.5%
Gross profit margin = 40%
Inventory turnover ratio = 6 times
Receivables turnover ratio = 25
Acid-test ratio = .9
Current ratio = 2 to 1
Return on shareholders’ equity = 10%
Debt to equity ratio = 1/3
Times interest earned ratio = 12 times
Jotted in the margins are the following notes:
Net income $15,000
Only one short-term note ($5,000); all other current liabilities are trade accounts
Property, plant, and equipment are the only noncurrent assets
Bonds payable are the only noncurrent liabilities
The effective interest rate on short=term notes and bonds is 8%
No investment securities
Cash balance totals $15,000
You are requested to approximate the current year’s balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported.
Explanation / Answer
Amswer
Balance Sheet
Assets
Cash $ 15,000 given
Accounts receivable (net) 12,000 (e)
Inventory 30,000 (d)
Prepaid expenses and other current assets 3,000 (i)
Current assets 60,000 (h)
Property, plant, and equipment (net) 140,000 (j)
$200,000 (b)
Liabilities and Shareholders’ Equity
Accounts payable $ 25,000 (g)
Short-term notes 5,000 given
Current liabilities 30,000 (f)
Bonds payable 20,000 (l)
Shareholders’ equity 150,000 (k)
$200,000 (b)
Income Statement
Sales $300,000 (a)
Cost of goods sold (180,000) (c)
Gross profit 120,000 (c)
Operating expenses (96,000) (o)
Interest expense (2,000) (m)
Tax expense (7,000) (n)
Net income $ 15,000
Calculations ($ in 000s):
a. Profit margin on sales = Net income ÷ Sales = 5%
Sales = $15 ÷ 5% = $300
b. Return on assets = Net income ÷ Total assets = 7.5%
Total assets = $15 ÷ 7.5% = $200
c. Gross profit margin = Gross profit ÷ Sales = 40%
Gross profit = $300 x 40% = $120
Cost of goods sold = Sales – Gross profit = $300 – 120 = $180
d. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6
Inventory = $180 ÷ 6 = $30
e. Receivables turnover ratio = Sales ÷ Accounts receivable = 25
Accounts receivable = $300 ÷ 25 = $12
f. Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9
Current liabilities = ($15 + 12 + 0) ÷.9 = $30
g. Accounts payable = Current liabilities – Short-term notes = $30 – 5 = $25
h. Current ratio = Current assets ÷ Current liabilities = 2
Current assets = $30 x 2 = $60
i. Prepaid expenses and other current assets =
Current assets – (Cash + AR + Inventory) = $60 – ($15 + 12 + 30) = $3
j. Property, plant, and equipment = Total assets – Current assets = $200 – 60 = $140
k. Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%
Shareholders’ equity = $15 ÷ 10% = $150
l. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1/3
Total liabilities = $150 x 1/3 = $50
Bonds payable = Total liabilities – Current liabilities = $50 – 30 = $20
m. Interest expense = 8% x (Short-term notes + Bonds )
Interest expense = 8% x ($5 + 20) = $2
n Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12
Times interest earned ratio = ($15 + 2 + Taxes) ÷ 2 = 12
Times interest earned ratio = ($15 + 2 + Taxes) = 24
Tax expense = $24 – ($15 + 2) = $7
o. Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax expense) – Net income = ($300 – 180 – 2 – 7) - 15 = $96
Balance Sheet
Assets
Cash $ 15,000 given
Accounts receivable (net) 12,000 (e)
Inventory 30,000 (d)
Prepaid expenses and other current assets 3,000 (i)
Current assets 60,000 (h)
Property, plant, and equipment (net) 140,000 (j)
$200,000 (b)
Liabilities and Shareholders’ Equity
Accounts payable $ 25,000 (g)
Short-term notes 5,000 given
Current liabilities 30,000 (f)
Bonds payable 20,000 (l)
Shareholders’ equity 150,000 (k)
$200,000 (b)
Income Statement
Sales $300,000 (a)
Cost of goods sold (180,000) (c)
Gross profit 120,000 (c)
Operating expenses (96,000) (o)
Interest expense (2,000) (m)
Tax expense (7,000) (n)
Net income $ 15,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.