Chapter 2.

Understanding the income statement

1. The Kammel Building company has a contract to build a building for $100 million.
The estimate of the cost of the project is $75 million. In the first year of the project,
Kammel had costs of $30 million. How much is the Kammel’s report profit for the first
year of the contract, using the completed contract method?
2. For the year ended December 31, 2017, Coco company reported the following
financial information:
Revenue $100,000
COGS 40,000
Operating expenses 20,000
Unrealized gain from foreign currency translation 5,000
Unrealized loss on cash flow hedging derivatives 3,000
Dividends paid to common shareholders 7,500
Realized gain on sale of equipment 1,000
Ignoring taxes, calculate Coco’s net income and comprehensive income for 2017?
3. An analyst has gathered the following data pertaining to Hegel Company’s
construction projects, which began during 20X2:
Project 1 Project 2
Contract price $ 420,000 $ 300,000
Cost incurred in 20X2 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during 20X2 150,000 270,000
Received from customers during 20X2 90,000 250,000
If Hegel used the completed contract method, what amount of gross profit (loss) would
Hegel report in its 20X2 income statement for project 1 and 2?
4. An analyst prepares the following common-size income statements for Pette Company:
20X1 20X2 20X3
Sales 100% 100% 100%
COGS 50% 52% 53%
Selling and administrative expense 16% 12% 9%
Interest income 4% 4% 4%
Pretax income 30% 32% 34%
Income tax expense 15% 16% 17%
Net income 15% 16% 17%
Based only on this information, Pette’s improving net profit margin is most likely a result
of………….?
5. Selected financial ratios from Mulroy Company’s common-size income statements are
as follows:
 20X1 20X2 20X3
Gross profit margin 22% 24% 26%
Operating profit margin 18% 20% 22%
Pretax margin 15% 14% 13%
Net profit margin 11% 10% 9%
Relative to sales, it is most likely that Mulroy’s:
a. Operating expense are increasing
b. Non-operating expenses are increasing
c. Income tax expenses is increasing
6. The Best Building company has a contract to build a building for $100 million. The
estimate of the cost of the project is $75 million. In the first year of the project, Best
Building had costs of $30 million. Calculate the Best Building company’s reported profit
for the first year of the contract, using the percentage – of – completion method?
 Chapter 3. Understanding the Balance Sheet
1. Blue Bell cop. reported the following financial information at the end of 2017
In millions
Merchandise inventory $ 240
Minority interest 70
Cash and cash equivalents 275
Accounts receivable 1,150
Account payable 225
Property & equipment 2,160
Accrued expenses 830
Current portion of long-term debt 120
Long-term debt 1,570
Retained earnings 1,010
a. Calculate the Blue Bell’s current asset and working capital?
b. Prepare the Balance Sheet for company based on the information above.
c. Prepare the common size balance sheet?
d. Calculate the liquidity ratios and solvency ratios?
2. Given the following income state and balance sheet for a company:
Balance sheet
Assets Year 2016 Year 2017
Cash 500 450
Account receivable 600 660
Inventory 500 550
Total Current Asset 1600 1660
Plant, Prop. equip 1000 1250
Total assets 2600 2910

Liabilities
Accounts payable 500 550
Long-term debt 700 1002
Total liabilities 1200 1552

Equity
Common stock 400 538
Retained Earnings 1000 820
Total liabilities & equity 2600 2910

Income statement
Sales 3000
Cost of goods sold (1000)
Gross profit 2000
SG & A (500)
Interest expense (151)
 EBT 1349
Taxes (30%) (405)
Net income 944

a. Calculate the current ratios, quick ratios and cash ratios for 2003 and 2004?
b. Calculate the company’s solvency ratios 2003 and 2004?
c. Calculate the company’s working capital (= current assets – current liabilities) 2003 and
2004?
d. Prepare the common size balance sheet for 2003 and 2004?
e. What is your conclusion from the company’s financial position base on the common size
balance sheet, liquidity ratios and solvency ratios?
3. Miller Company reported the following financial information at the end of 2017:
In millions
Unearned revenue $ 240
Common stock at par 30
Capital in excess of par 440
Account payable 1,150
Treasury stock 2,000
Retained earnings 5,160
Accrued expenses 830
Accumulated other comprehensive income 210
Long-term debt 1,570
Calculate the Miller’s liabilities and stockholder equity as of December 31, 2007?
 Chapter 4. Understanding the Cash flow statement
1. From the following table:
Item Amount
Cash payment of dividends $30
Sale of equipment $10
Net income $25
Purchase of land $15
Increase in account payable $20
Sale of preferred stock $25
Increase in deferred taxes $5
Profit on sale of equipment $15
Determine the cash flow from financing activities
2. Financial information of ABC corp. for the year ended December 31st, was as follows:
Items Amount
Sales $3,000,000
Purchases 1,800,000
Inventory at beginning 500,000
Inventory at Ending 800,000
Account receivable at beginning 300,000
Account receivable at ending 200,000
Account payable at beginning 100,000
Account payable at ending 100,000
Other operating expenses paid 400,000
Based upon this data and using the direct method, what was ABC corp.’s cash flow from
operations for the year ended December 31st?
3. A firm has net sale of $3,500, earnings after taxes of $1,000, depreciation expense of
$500, cost of goods sold of $1,500, and cash taxes of $500. Also, inventory decrease by
$100, and accounts receivable increased by $300. What is the firm’s cash flow from
operations?
4. Use the following financial data for XYZ Corp., calculate the cash flow from
operations using the indirect method.
Items Amount
Net income $225
Increase in account receivable 55
Decrease in inventory 33
Depreciation 65
Decrease in accounts payable 25
Increase in wages payable 15
 Decrease in deferred taxes 10
Purchase of new equipment 65
Dividend paid 75
5. Solar Industries’ income statement and related notes for the year ended December 31 st
are as follows (in $):
Items Amount
Sales 42,000,000
COGS (32,000,000)
Wages expense (1,500,000)
Depreciation expense (2,500,000)
Interest expense (1,000,000)
Income tax expense (2,000,000)
Net income 3,000,000
During the year:
- Wages payable increased $100,000
- Accumulated Depreciation increased $2,500,000
- Interest payable decreased $200,000
- Income taxes payable increased $500,000
- Dividends of $100,000 were declared and paid
Calculate the cash flow from operation of this company.
6. BoA company’s financial statements for the year ended December 31, 20X7 were as
follows (in $ millions):
Income statement
Sales 150
COGS (48)
Wages expense (56)
Interest expense (12)
Depreciation (22)
Gain on sale of equipment 6
Income tax expense (8)
Net income 10

Balance sheet
31-Dec-X6 31-Dec-X7
Cash 32 52
Account receivable 18 22
Inventory 46 44
 PP & E (net) 182 160
Total assets 278 278
Account payable 28 33
Long-term debt 145 135
Common stock 70 70
Retained earnings 35 40
Total Liabilities & equity 278 278
Calculate the cash flow from operations for BoA Company for the year ended Dec 31 st,
20X7 (in $ millions)?
7. A company has the following changes in its balance sheet accounts:
Net sales $500
An increase in account receivable 20
A decrease in accounts payable 40
An increase in inventory 30
Sale of common stock 100
Repayment of debt 10
Depreciation 2
Net income 100
Interest expense on debt 5
Calculate the company’s cash flow from financing?
8. Mulbery corp. reported the following revenues and expenses for the year ended 2017:
Sale revenue $200,000
Wage expense 89,000
Insurance expense 17,000
Interest expense 10,400
Depreciation 50,000
expense
Following are the related balance sheet accounts:
2017 2016
Unearned revenue $15,60 $13,200
0
Wages payable 5,400 6,600
Prepaid insurance 1,200 0
Interest payable 500 1,600
Accumulated 95,000 45,000
depreciation
Calculate cash collections and cash expenses.
9. An analyst has gathered the following information about a company:
Income statement for the year 20X7
Sales $1,500
Expenses
COGS $1,300
Depreciation 30
Interest expenses 40
Total expenses 1,370
Income from cont. op. 130
Gain on sale 30
Income before tax 160
Income tax 64
Net income $96

Additional information:
Dividend paid $30
Common stock sold 20
Equipment purchased 50
Bonds issued 80
Fixed asset sold for (original cost of $100 with accumulated 60
depreciation of $70)
Account receivable decreased by 30
Inventory decreased by 20
Accounts payable increased by 20
Wages payable decreased by 10
What is the cash flow from operations?
 Chapter 5. Financial Ratios
1. Given the following income statement and balance sheet for a company
Balance sheet
 Assets 2015 2016 2017
Cash 450 500 450
Account receivable 500 600 660
Inventory 450 500 550
Total CA 1400 1600 1660
PP&E 1000 1000 1250
Total assets 2400 2600 2910
       
Liabilities      
Account payable 480 500 550
Longterm debt 800 700 1102
Total liabilities 1280 1200 1652
Equity      
Common stock 400 400 538
Retained earnings 720 1000 720
Total liabilities & Equity 2400 2600 2910

Income statement
  2016 2017
Sales 2800 3000
COGS -1150 -1000
Gross profit 1650 2000
SG&A 490 500
Interest expense 135 151
EBT 1025 1349
Taxes (30%) 307.5 404.7
Net income 717.5 944.3
Calculate and interpret the Activity ratios, Liquidity ratios, Solvency ratios and
Profitability ratios.
2. Given the following income statement and balance sheet for a company
Balance sheet
Assets 2016 2017
Cash 200 450
Account receivable 600 660
Inventory 500 550
Total CA 1300 1660
 PP&E 1000 1580
Total assets 2300 3240
     
Liabilities    
Account payable 400 550
Longterm debt 700 1052
Total liabilities 1100 1602
Equity    
Common stock 400 538
Retained earnings 800 1100
Total liabilities & Equity 2300 3240

 Income statement 2017 Average ratios of the industry 2017

Sales 3000 Activity ratios Inventory turnover 3
COGS -1000   Receivable turnover 5
Gross profit 2000   Payable turnover 2
SG&A 500   Fixed asset turnover 4.5
Interest expense 151   Total assets turnover 2.5
EBT 1349 Liquidity ratios Current ratio 2
Taxes (30%) 404.7   Quick ratio 1
Net income 944.3   Cash ratio 0.5
Solvency ratios Debt to caplital 0.6
  Interest coverage 4.5
Profitability ratios ROS 15%
  ROA 18%
  ROE 20%

Calculate and interpret the Activity ratios, Liquidity ratios, Solvency ratios and
Profitability ratios.