It is Dec 31, 2015 and Mr. X is reflecting on the first year of his new business
ID: 2555372 • Letter: I
Question
It is Dec 31, 2015 and Mr. X is reflecting on the first year of his new business, OBD Inc. He has hired you to create financial statements for the company and you agree. You interview him – and he shares with you a great deal of information – which is listed below. He asks that you compile an income statement and balance sheet.
Sales were $1,000,000
Gross profit margin was 60%
Operating margins were 12%
The Bank of Toronto provided a loan on Jan 1, 2015 worth $300,000. The annual interest is 8% and is compounded annually. Interest only payments are needed – until the loan is due in 10 years, where a balloon payment for the full balance must be paid.
The combined federal and provincial tax rates is 27%
Mr. X knows that the ending cash balance in his company is 200,000.
Accounts Receivables is 10% of sales
Inventory is 15% of sales
Accounts Payable is 5% of sales
Accrued expenses payable is 5.5% of sales
Capital equipment purchases were made at the start of the year. These total $50,000. These depreciate at 10% per year
Mr. X will provided all other capital in the form of equity financing
As a smart young consultant, Mr. X has asked you to figure out his SG&A (Selling General and Administrative expenses).
Explanation / Answer
OBD Inc. Income Statement For the Year Ended December 31, 2015 Sales 1000000 Cost of goods sold 400000 Gross profit (60% x $1000000) 600000 Operating expenses: Depreciation expense 5000 Selling and administrative expense 475000 Operating income (12% x $1000000) 120000 Interest expense (8% x $300000) 64000 Income before income taxes 56000 Income tax expense (27% x $56000) 15120 Net income 40880 OBD Inc. Balance Sheet December 31, 2015 Assets Cash 200000 Accounts receivable (10% x $1000000) 100000 Inventory (15% x $1000000) 150000 Equipment 50000 Less: Accumulated depreciation (10% x $50000) -5000 Total assets 495000 Liabilities and Owner's Equity Accounts payable (5% x $1000000) 50000 Accrued expenses payable (5.5% x $1000000) 55000 Long-term loan payable 300000 Capital 49120 Retained earnings 40880 Total liabilities and owner's equity 495000
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