It’s your first day on the job at Webco, and you’ve come across a set of seeming
ID: 2726616 • Letter: I
Question
It’s your first day on the job at Webco, and you’ve come across a set of seemingly random forecasted financial information. Your boss asks you to make sense of it all (and you are not quite sure that you even need all the data).
($ 000s) 2016 2017
Other expenses 405 337
Depreciation 851 883
Cost of goods sold 1,788 2,006
Inventory 6,441 6,596
Interest 311 359
Sales 5,624 5,867
Accounts receivable 3,436 3,895
Short-term notes payable 480 648
Long-term debt 9,184 10,803
Net fixed assets 23,225 22,858
Accounts payable 2,778 2,696
Cash 2,640 2,708
Dividends 452 513
Tax rate 32% 32%
(a) Create an Income Statement for 2016 and 2017with the following captions: Sales Costs Other expenses Depreciation EBIT Interest EBT Taxes Net Income Dividends Addition to Retained Earnings
(b) Create a Balance Sheet for 2016 and 2017.
(c) Provide a plausible explanation for why Shareholders’ Equity falls in 2017 despite the profit retained (“Addition to Retained Earnings”).
Explanation / Answer
a)
The income statement of webco for the year 2016 and 2017 are given below
Consolidated income statement of WEBCO
January 1 to
December 31
January 1 to
December 31
in dollars thousand
2016
2017
Sales of goods
5 624
5 867
Total sales
5 624
5 867
Cost of sales
-1 788
-2 006
Gross profit
3 836
3 861
Other expense
- 405
- 337
Depreciation
-851
-883
Result before interests and taxes (EBIT)
2 580
2 641
Interest
- 311
- 359
Result before taxes (EBT)
2 269
2 282
Income taxes
726
730
Net profit
1 543
1 552
Dividends paid to share holders
452
513
Transferred to retained earnings
1 091
1 039
Now we will make the balance sheet of Webco for the year ended 2016,2017
Consolidated balance sheet of WEDCO
Assets
in dollars thousands
2016
2017
Cash and cash equivalents
2 640
2 708
Account receivables
3 436
3 895
inventories
6 441
6 596
Current assets
12 517
13 199
net fixed assets
23 225
22 858
Non current assets
23 225
22 858
Total Assets
35 742
36 057
Liabilities and Equity
in dollars thousands
2016
2017
Accounts payable
2 778
2 696
Short term notes payable
480
648
Current liabilties
3 258
3 344
Long term debt
9 184
10 803
Non-current liabilties
9 184
10 803
Total liabilities
12 442
14 147
Share capital (balancing figure)
22 209
20 871
Reserves and retained earnings
1 091
1 039
Total equity
23 300
21 910
Total liabilities and equity
35 742
36 057
3) the share holder equity has fallen to $20,871,000 in 2017 from $22,209,000 in 2016 a reduction of $1,338,000 because of following reason
There is increase in long term debts by $1619,000 to take care of reduction in share holder equity in 2017 it can be due to buyback of shares by the company and issue of long term bonds
Consolidated income statement of WEBCO
January 1 to
December 31
January 1 to
December 31
in dollars thousand
2016
2017
Sales of goods
5 624
5 867
Total sales
5 624
5 867
Cost of sales
-1 788
-2 006
Gross profit
3 836
3 861
Other expense
- 405
- 337
Depreciation
-851
-883
Result before interests and taxes (EBIT)
2 580
2 641
Interest
- 311
- 359
Result before taxes (EBT)
2 269
2 282
Income taxes
726
730
Net profit
1 543
1 552
Dividends paid to share holders
452
513
Transferred to retained earnings
1 091
1 039
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