Financial Management

Learning Activity No. 1

Analysis of Financial Statements

I. Solve the following problem:

1. Given the data below, reconstruct the balance sheet and the income statement
of Rodelas Pearls for the year 2021:

Rodelas Pearls
Balance Sheet
December 31, 2021

ASSETS

Current Assets:
Cash 122,000
Marketable Securities 50,000
Accounts Receivable, net 140,000
Inventories 237,500 549,500
Property & Equipment:
Plant & Equipment, net 890,500
TOTAL ASSETS 1,440,000

LIABILITIES & STOCKHOLDERS EQUITY

Current Liabilities 240,000

Long Term Liabilities:
Bonds Payable, 12.5% 400,000
TOTAL LIABILITIES 640,000
Stockholders’ Equity:
Ordinary Share 500,000
Retained Earnings 300,000 800,000
TOTAL LIABILITIES & 1,440,000
STOCKHOLDERS EQUITY
 Rodelas Pearls
Income Statement
For the year ended December 31, 2021

Net Sales 1,500,000

Cost of Goods Sold 975,000
Gross Margin on Sales 525,000
Operating Expenses 225,000
Operating Income 300,000
Other Expense: Interest Expense 50,000
Net Income before Taxes 250,000
Income Tax (35% Tax Rate) 87,500
NET INCOME 162,500

Additional Data:
1. Operating expenses were 15% of net sales.
2. Acid test ratio was 1.3:1.
3. Times interest earned was 6 times.
4. Gross margin was 35% of net sales.
5. The age of receivables was 36 days.
6. The beginning accounts receivable was Php 160,000. Use 360 day year.
7. Inventory turnover was 4 times. The beginning inventory amounted to Php
250,000.
8. Total debt to stockholders’ equity was 0.8:1.

Required: Compute the following requirements using the given formula:

1. Net Sales =(Gross margin/gross margin ratio)

2. Cost of sales= (Net Sales x Cost of Sales ratio)
3. Operating Expenses= (Net Sales x % to Net Sales)
4. Operating Income = (Net Sales – Cost of Sales – Operating Expenses)
5. Interest Expense = (Operating Income/Times Interest Earned
6. Bond Payable = (Interest Expense/Interest Rate)
7. Receivable Turnover =(360 days/Age in Receivables)
8. Average Receivables = (Net Credit Sales/Receivable Turnover)
9. Ending Accounts Receivable = (Average Receivables x 2)
10. Average Inventory = (Cost of Goods Sold / Inventory Turnover)
11. Ending Inventory = (Average Inventory x 2)
12. Total Debt = (Ratio of Total Debt & Stockholders’ Equity)
13. Current Liabilities = (Total Debt - Bonds Payable)
14. Quick Assets = (Acid Test ratio x Current Liabilities)
15. Cash = (Quick Assets – Marketable Securities – Accounts Receivable)
Computations:

1. Net Sales = (Gross margin/Gross margin ration)

= 525,000/35%
= 1,500,000
2. Cost of Sales = (Net sales – Gross Margin of Sales)
= 1,500,000 – 525,000
= 975,000
3. Operating Expenses = (Net Sales x % Net sales)
= 1,500,000 x 15%
= 225,000
4. Operating Income = (Net Sales – Cost of Sales – Operating Expenses)
= 1,500,000 – 975,000 -225,000
= 300,000
5. Interest Expenses = (Operating Income/Times Interest Earned)
= 300,000/6
= 50,000
6. Bond Payable = (Interest Expense/Interest Rate)
= 50,000/12.5
= 400,000
7. Receivable Turnover = (360 days/Age in Receivables)
= 360/36
= 10
8. Average Receivables = (Net Credit Sales/Receivable Turnover)
= 1,500,000/10
= 150,000
9. Ending Accounts Receivable = (Average Receivables x 2) – Beginning Accounts Receivable
= (150,000 x 2) – 160,000
= 140,000
10. Average Inventory = (Cost of Goods Sold / Inventory Turnover)
= 975,000/4
= 243,750
11. Ending Inventory = (Average Inventory x 2) – Beginning Inventory
= (243,750 x 2) – 250,00
= 237,500
12. Total Debt = (Ratio of Total Debt x Stockholders’ Equity)
= 0.8 x 800,000
= 640,000
13. Current Liabilities = (Total Debt - Bonds Payable)
= 640,000 – 400,000
= 240,000
14. Quick Assets = (Acid Test ratio x Current Liabilities)
= 1.3 x 240,000
= 312,000
15. Cash = (Quick Assets – Marketable Securities – Accounts Receivable)
= 312,000 – 50,000- 105,000
= 157,000