Exhibit 1.

Preparing an income statement and a balance sheet

The accounting records of Data Systems Corporation, a developer of computer software,

provided the following information (amounts in thousands):

May 31, 2009 May 31, 2010

Income Statement Items:

Administrative Expenses $ 230,035

Cost of Goods Sold 499,213
Income Tax Payable 139,743
Interest Expense 4,554
Interest Revenue 3,000
Marketing Expenses 197,086
Research and Development Expenses 649,796
Sales 2,001,147

Balance Sheet Items:

Accounts Payable $ 72,863 $ 95,799
Accounts Receivable 484,532 610,854
Buildings (net of accumulated depreciation) 41,835 86,492
Cash, current 224,560 304,810
Cash, deposit 60,000 100,000
Common Stock 202,913 202,913
Salaries and Compensation Payable 103,099 136,488
Software Development Cost (net of accumulated
amortization) 121,199 140,889
Equipment (net of accumulated depreciation) 107,736 198,234
Land 39,667 93,757
Long-term Cash Investments 31,276 0
Long-term Debt (Bank loan) 86,380 82,800
Notes Payable (short-term) 10,684 6,943
Other Current Liabilities 283,776 335,544
Other Non-current Liabilities 18,258 18,279
Retained Earnings 325,126 608,846
Short-term Cash Investments 73,215 59,948
Taxes Payable 80,921 107,372

Required: Prepare the Income Statement for the year ended May 31, 2010 and the comparative
Balance Sheet as of May 31, 2009 and 2010

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Solution
Data Systems Corporation
Income Statement for the year ended May 31, 2010

Sales $2,001,147
Cost of Goods Sold (499,213)
Gross Margin $1,501,934
Interest Revenue 3,000
$1,504,934
Expenses:
Marketing $ 197,086
Research and Development 649,796
Administrative 230,035
Interest Expense 4,554 $(1,081,471)
Income Before Tax $ 423,463
Income Tax (139,743)
Net Income for the Year $ 283,720
Retained Earnings, May 31, 2009 325,126
Less: Dividend Declared 0
Retained Earnings, May 31, 2010 $ 608,846

Data Systems Corporation

Comparative Balance Sheet as of May 31
2009 2010
ASSETS
Current Assets
Cash, current $ 224,560 $ 304,810
Cash, deposit 60,000 100,000
Short-term Cash Investments 73,215 59,948
Accounts Receivable 484,307 610,854
Total Net Current Assets $ 842,307 $1,075,612

Non-current Assets
Long-term Cash Investments $ 31,276 0
Land 39,667 93,757
Buildings (net of accumulated depreciation) 41,835 86,492
Equipment (net of accumulated depreciation) 107,736 198,234
Software Development Costs (net of accumulated
amortization) 121,199 140,889
Total Non-current Assets $ 341,713 $ 519,372

Total Assets $1,184,020 $1,594,984

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 LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable $ 72,863 $ 95,799
Notes Payable 10,684 6,943
Salaries and Compensation Payable 103,099 136,488
Taxes Payable 80,921 107,372
Other Current Liabilities 283,776 335,544
Total Current Liabilities $ 551,343 $ 682,146

Non-current Liabilities
Long-term Debt $ 86,380 $ 82,800
Other Non-current Liabilities 18,258 18,279
Total Non-current Liabilities $ 104,638 $ 101,079
Total Liabilities $ 655,981 $ 783,225

Shareholders’ Equity
Common Stock $ 202,913 $ 202,913
Retained Earnings 325,126 608,846
Total Shareholders’ Equity $ 528,039 $ 811,759

Total Liabilities and Shareholders’ Equity $1,184,020 $1,594,984

Questions
Question 1. Balance sheet relations
Selected data for Ohio Laboratories, a pharmaceutical company, for four recent years (in millions):
Year 8 Year 9 Year 10 Year 11
Total Assets $109 $........ $....... $170
Non-current Liabilities 8 2 ....... 4
Non-current Assets ....... 45 75 .......
Total Liabilities and Shareholders’ Equity ....... 113 ....... .......
Current Liabilities 12 ........ 7 12
Shareholders’ Equity ....... 104 127 .......
Current Assets 74 ........ 63 83

Required:
a. Compute the missing balance sheet amounts for each of the four years
b. How did the structure of total assets change over the four-year period?
c. How did the structure of total liabilities plus shareholders’ equity change over the
four-year period?

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Question 2. Relating net income to balance sheet changes
The comparative balance sheet for Good Run, an athletic footwear company, as of December 31,
Year 2, Year 3 and Year 4, appear below (amounts in millions):
Year 2 Year 3 Year 4
Total Assets $266 $364 $325

Liabilities $ 98 $158 $ 94
Common Stock 85 91 192
Retained Earnings 83 115 39
Total Liabilities and Shareholders’ Equity $266 $364 $325

Good Run declared and paid zero dividend during Year 3 and $2 million dividend during Year 4.

Required:
a. Compute net income after tax for Year 3 and Year 4 by analyzing the change in retained
earnings.
b. Demonstrate that the following relation holds:
Net income after tax = Increase in assets – Increase in liabilities
- Increase in contributed capital + Dividend

(Contributed capital represents amounts paid in, usually cash, by owners/investors.)

In the balance sheet the title is Common Stock.

Question 3. Income statement relations

Information for D’Agostino, a discount store and warehouse chain, for three recent years appears
below (amounts in millions):
Year 6 Year 7 Year 8
Sales $25,986 $........... $44,289
Cost of Goods Sold 20,070 25,500 …........
Selling and Administrative Expenses 4,070 5,152 6,684
Interest Expense 138 169 266
Income Tax 632 752 945
Net Income $........... $ 1,291 $ 1,608

Required:
a. Compute the missing amounts for each of the three years.
b. Prepare a common-size income statement for each year in which sales equals 100%
and each expense and the net income are expressed as a percentage of sales.

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Question 4. Preparing a balance sheet and an income statement
Three recent graduates, set up a management consulting practice on December 31, Year 1, by issuing
common stock for $750,000. Other information is as follows:
Income Statement Items
Revenue from Consulting Services $350,000
Rental Revenue ( from renting part of building) 30,000
Salaries Expense 180,000
Utilities Expenses 32,000
Property Taxes and Insurance Expense 30,000
Supplies Expense 20,000
Depreciation Expense 25,000
Income Tax 18,000
Dividend Information
Dividend Declared and Paid $ 60,000
Balance Sheet Items
Cash $ 50,000
Accounts Receivable from Clients 160,000
Supplies Inventory 5,000
Office Equipment (net of depreciation) 85,000
Office Building (net of depreciation) 500,000
Accounts Payable to Suppliers 10,000
Payroll Taxes Payable 13,000
Income Taxes Payable 12,000
Common Stock 750,000

Required:
a. Prepare an income statement for the corporation for the year ending
December 31, Year 2.
b. Prepare a comparative balance sheet as at December 31, Year 1
and December 31, Year 2.

Question 5. The balance sheet equation

The question is based on the main equation: Assets = Liabilities + Equity
Costas, a micro entrepreneur, has decided to set up a business selling football dresses from a stall
in the market place. The transactions are the following:
1. He places $3,000 into a bank account for the business.
2. Costas obtains a loan of $4,000 from his brother to purchase a motor van for the business.
3. Costas buys a market stall and pays $500 for it in cash.
4. He buys some football dresses for $1,800 from the producers on credit.
5. He pays $1,000 to his suppliers for some of the dresses purchased.
6. Costas sells 50% of the dresses for $1,400 cash.
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7. Costas sells football dresses for $1,050 to a shop owner in another town. These goods
originally cost $550. He sells the dresses on credit, giving the buyer one month time to
pay for them.
8. He pays back $1,000 from the loan to his brother.
9. Payment is made to trade suppliers in the amount of $600.
10. He receives $800 of the money from the customer.
11. Costas purchases another set of football dresses for $250 on credit.
12. At the end of the month, he takes out from the business $700 cash and football dresses in
the value of $150.

Required: Show the solution in the following way:

Assets = Liabilities + Equity

1. Cash 3,000 = 0 + Capital 3,000

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