Port Folio Number 2. Construction of Financial Statements.

Financial Analysis may be used to test the

fairness of the relationships among current financial data against prior financial information. Given
established financial relationships and few key amounts, a CPA could also prepare projected financial
statements. Junnie Sales Corporation has in recent Prior year maintained the following relationships
among the data on its financial statements:

Net Income on Net Sales 5%

Gross Income Rate on Net Sales 35%
Ratio of Selling Expense to Net Sales 15%
Acid-Test Ratio 2 is to 1
Current Ratio 3 is to 1
Accounts receivable Turnover 5 times
Inventory Turnover 5 times
Composition of Quick Assets
Accounts Receivable 60%, Cash 10%, and Marketable Securities 30 %
Asset Turnover 1 per year
Ratio of Total Asset to Intangible Assets 20 is to 1
Ratio of Working Capital to Shareholders Equity 1 is to 1.6
Ratio of Accounts Receivable to Accounts Payable is 1.5 is to 1
The ratio of total liabilities to Stockholders Equity is 1.4 is to 1.6
The ratio of accumulated depreciation and Fixed Assets Cost is 1 is to 3
Times Interest Earned Ratio 2 is to 1

For 1990, the company projects to have a net income of 150 000 which will result in an earnings
of 10 per share of common stock. Additional Information includes the following;

a. Common stock has a par value of 50 per share and was issued at 20% premium
b. 8% Preferred stock has a par value of 50 pesos per share and was issued at 10% premium
c. Preference dividends are paid in 1989 , 10 000. The same amount will be p[aid in 1990.
d. The companys purchases and sales are all on account. For projection purposes, it is assumed
that the above relationships among the data on the financial statements of junnie Sales
Corporation shall also hold true for 1990.

Required: Prepare a projected Balance sheet and Income Statement (Ignore Income Tax)

Junnie Sales Corporation

Projected Income Statement
For the year ending December 31, 1990

Net Sales P 3 000 000

Cost of Sales (1950 000)
Gross Profit 1050 000
Selling Expenses (450 000)
Other Expenses (300 000)
Interest expense (150 000) 900 000
Net Income 150 000 php
 Junnie Sales Corporation
Projected Statement of Financial Position
For the year ending December 31, 1990

ASSETS
Current assets
Cash P 100 000
Accounts Receivable 600 000
Marketable Equity Securities 300 000
Inventories 390 000
Other Current Assets 110 000
Total Current assets P 1 500 000
Non Current Assets
Fixed Asset P 2 025 000
Less: Acc. Depreciation: 675 000
Book Value 1350 000
Intangible Assets 150 000
Total Non Current Assets 1500 000
Total Assets P 3 000 000

LIABILITIES AND SHAREHOLDERS EQUITY

Liabilities
Current Liabilities
Accounts Payable P 400 000
Other Current Liabilities 100 000
Total Current Liabilities P 500 000
Non Current Liabilities
Long term liabilities P 900 000
Total Non Current Liabilities 900 000
Total liabilities P1 400 000
Shareholders equity
Ordinary shares,50 par. Issued 14 000 shares P 700 000
Share Premium ordinary shares 140 000
8% Preference shares, par 50, 2500shares issued 125 000

Share Premium Preference shares 12 500

Retained earnings 622 500
Total Shareholders Equity P1 600 000
Total liabilities and shareholders Equity P 3 000 000
Solution:
NetIncome 150000
Net Income on Net Sales ! ! ! 0.05
NetSales NetSales
Thus, NetSales ! 150000 ! 3000000
0.05

GrossIncome
Gross Income Rate on Net Sales ! ! . 35
NetSales
GrossIncome
! ! . 35
3000000

Thus, Gross Income = .35( 3000 000) = 1 050 000

SellingExpenses SelingExpenses
Ratio of Selling Expense to Net Sales ! ! ! .15
NetSales 3000000
Thus, Selling Expense = 3 000 000 (.15) = 450 000

etSales 3000000
Accounts receivable Turnover !
AverageAccounts Re ceivable !
ar ! 5ti es
3000000
Thus, Projected Accounts Receivable = ! 600000
5

If the composition of Quick assets is:

60% accounts Receivable

10% cash
30 % marketable securities

Thus,
600000
Quick assets= ! 1,000,000
. 60
Consequently,

60% Accounts Receivable 600, 000

10% Cash 100, 000
30 % Marketable Securities 300, 000
TOTAL (100%) 1, 000, 000

Quick ssets
Acid-Test Ratio ! ! 2
CurrentLiabilities
 1,000,000
! ! 2
CurrentLiabilities
Thus, Current Liabilities will be equal to 1,000,000 divided by 2 or 500,000

Current ssets
Current Ratio ! ! 3
CurrentLiabilities

urrentAss ets
! ! 3
500,000
Thus, Current Assets will be three(3) times of current liabilities or an amount equal to 1,500,000

Since the asset turnover is 1 then

NetSales 3,000,000
Asset Turnover = ! ! ! 1
ave. ssets verage ssets

Thus, Average Assets is equal to 3,000,000 divided by 1 or 3,000,000

And so it means that the Total Assets is 3, 000, 000 and the total Liabilities plus SHE is also 3,000,000

Furthermore, it also mean

Current that,+ Non Current Asset = 3, 000,0000
Asset
1,500,000 + Non Current Asset = 3, 000,0000
Non Current Asset = 3, 000,0000  1,500,000
Non Current Asset = 1,500,000

Given that

Ratio of Total Asset to Intangible Assets then

Total Assets/ Intangible Asset = 3,000,000/intangible asset = 20
Then, intangible asset is equal to 150,000

And so it means than, the book value of the fixed asset is equal to 1500 000  150 000 or 1 350 00
It follows that,
Since, The ratio of accumulated depreciation and Fixed Assets Cost is 1 is to 3 then;

Fixed Asset xxx 3

Less: Accumulated depreciation (xxx) 1
Book Value 1,350,000

Or 3x - 1x = 1,350,000 or 2x= 1,350,000 which is equal to x=675,000 thus

Fixed Asset xxx 3 2 025 000

Less: Accumulated depreciation (xxx) 1 675 000
Book Value 1,350,000 1 350 000
Since the Ratio of Accounts Receivable and Accounts Payable is 1.5 is to 1 then it follows that

Accounts Receivable = 1.5 or 600,000 = 1.5 or AP = 600,000 = 400,000

Accounts Payable AP 1.5

And Since the Current Liabilities is 500,000 and the only mentioned Current Liability is Accounts Payable
which is worth 400,000 then theres OTHER CURRENT LIABILITIES which is to be valued at
100,000.

Working Capital ! urrentAss ets  urrent ia bilities

! 1,500,000  500,000
! 1,000,000

And since the Ratio of Working Capital To SHE is 1 is to 1.6 then

WC:SHE=1:1.6
1,000,000 : SHE = 1 : 1.6

1,000,000 *1.6
Thus, SHE = ! 1,600,000
1

In Addition since According to the Given,

If the net income is 150 000 then the EPS will be 10 pesos per share, putting into an equation, then we
have,

NetIncome  Preference Dividend

Earnings Per Share ! ! 10
Common Shares Outstandin g
150,000  10,000
! ! 10
Common Shares Outstandin g

140,000
! ! 10
ommon hares utstandin g
140,000 ! ommon hares utstanding
10
14,000 ! ommon hares utstanding

Thus, 14,000 shares multiply to 50 pesos par vale, then the total par value of issued Ordinary Shares is
700,000. And since these shares are issued at 20% share premium or 700 000(1.2) =840 000
which is break downed into 700 000 @par and 140 000 of which is the share premium.

Since it is assumed that 10 000 pesos is still the worth of the dividend to be re ceived by preference
share holders then
10,000 / .08 = 125 000 is the par value of all the preference share issued
And since the aforementioned shares are issued at 10% share premium, then the issuance resulted to a
share premium on preference shares of 12 ,500 pesos.
Trying to complete the shareholders equity then,
Shareholders equity
Ordinary shares,50 par. Issued 14 000 shares P 700 000
Share Premium ordinary shares 140 000
8% Preference shares, par 50, 2500shares issued 125 000
Share Premium Preference shares 12 500
Retained earnings xxx
Total Shareholders Equity P1 600 000

Working back then the Retained Earnings Balance should be 622 500

And since the ratio of total liabilities to Stockholders Equity is 1.4 is to 1.6

Then,
Total liabilities : Stockholders Equity = 1.4 : 1.6
TL : 1, 600, 000 =1.4 : 1.6
Thus,

1,600,000(1.4)
Total Liabilities ! ! 1,400,000
1.6

And since the Current Liabilities is valued at 500 000 then the Non Current Liabilities is worth 900,000.

Given the formula

NetIncome  Interest
Times Interest Earned Ratio !
Interest
And since
NetIncome  Interest
Times Interest Earned Ratio ! ! 2 then,
Interest
150,000  Interest
! ! 2
Interest
150,000  Interest ! 2(Interest)

then,
150,000 ! 2(interest ) (interest)
150,000 ! interest

Cost of Sales = Net Sales  Gross Profit

= 3,000,000  1,050,000
= 1,950,000
ostofsale s 1950000
Inventory Turnover ! ! ! 5
AverageInventory x
Then The Projected Inventory Should be 1950 000/5 or 390 000
Financial Statement Ratios

Quick ssets
Acid-Test Ratio !
CurrentLiabilities

1,000,000
! ! 2
500,000

Current ssets
Current Ratio !
CurrentLiabilities

1,500,000
! ! 3
500,000

NetInco e 150000
Net Income on Net Sales ! ! ! 0.05
NetSales 3000000

GrossIncome 1050000
! ! 3
Gross Income Rate on Net Sales NetSales 3000000 . 5

Selling xpenses 450000

Ratio of Selling Expense to Net Sales ! ! ! .15
NetSales 3000000
NetSales 3000000
Accounts receivable Turnover ! ! ! 5ti es
AverageAccounts Re ceivable 600000

ostofsale s 1950000
Inventory Turnover ! ! ! 5 times
AverageInventory 390000

Composition of Quick Assets

Accounts Receivable 600, 000 60%

Cash 100, 000 10%
Marketable Securities 300, 000 30 %
TOTAL 1, 000, 000 100%

NetSales 3,000,000
Asset Turnover = ! ! ! 1
Ave. Assets 3,000,000

Ratio of Total Asset to Intangible Assets

Total Assets/ Intangible Asset = 3,000,000/150,000 = 20 is to 1

Ratio of Working Capital to Shareholders Equity

Working Capital : Shareholders Equity = 1 : 1.6

1,000,000 : 1,600,000 =1 is to 1.6

Ratio of Accounts Receivable to Accounts Payable is

Accounts Receivable = 600,000 = 1.5 is to 1

Accounts Payable 400,000

The ratio of total liabilities to Stockholders Equity is 1.4 is to 1.6

Total liabilities : Stockholders Equity = 1.4 : 1.6

1,400,000 : 1, 600, 000 = 1.4 : 1.6

The ratio of accumulated depreciation and Fixed Assets Cost is

Accumulated Depreciation = 750 000 = 1 is to 3

Cost of the Fixed Asset 2 250 000

NetIncome  Interest 150,000  150,000

Times Interest Earned Ratio ! ! ! 2
Interest 150,000

Net Income  Preference Dividend 150,000  10,000

Earnings Per Share ! ! 10
Common Shares Outstandin g 14,000