c
  

 

 


 
 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 Asset͛s 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 company͛s 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


 

  
Cash P 100 000
Accounts Receivable 600 000
Marketable Equity Securities 300 000
Inventories 390 000
Other Current Assets 110 000
0

 
 P 1 500 000
?


Fixed Asset P 2 025 000
Less: Acc. Depreciation: 675 000
Book Value 1350 000
Intangible Assets 150 000
0


 
1500 000
  P 3 000 000


 
 
 





 
Accounts Payable P 400 000
Other Current Liabilities 100 000
0

 
 P 500 000
?


Long term liabilities P 900 000
0


 
     900 000
 
 P1 400 000
`   

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
  
 

 P1 600 000
 
 
 

 P 3 000 000
Solution:
?

 uuuu
Net Income on Net Sales ´ ´ ´ u
u
?
  ?
 
Thus, ?
  ´  uuuu ´ ½uuuuuu
u
u

 

Gross Income Rate on Net Sales ´ ´
½

?
 

 

´ ´
½
½uuuuuu

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

         
Ratio of Selling Expense to Net Sales ´ ´ ´

?
  ½uuuuuu
Thus, Selling Expense = 3 000 000 (.15) = 450 000

  ½uuuuuu
Accounts receivable Turnover ´ ´ ´

   
    
½uuuuuu
Thus, Projected Accounts Receivable = ´ ^uuuuu

If the composition of Quick assets is:

60% accounts Receivable

10% cash
30 % marketable securities

Thus,
^uuuuu
Quick assets= ´ uuuuuu

^u
Consequently,

60% Accounts Receivable 600, 000

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


  

Acid-Test Ratio ´ ´à
 
  

 uuuuuu
´ ´à
 
  

Thus, Current Liabilities will be equal to 1,000,000 divided by 2 or 500,000

 


Current Ratio ´ ´½
 
  


´
 


´½
uuuuu
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

?
  ½uuuuuu   
 ´ 
Asset Turnover = ´ 



´
 

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 that,
Current Asset + Non Current Asset = 3, 000,0000
1,500,000 + Non Current Asset = 3, 000,0000
Non Current Asset = 3, 000,0000 ʹ 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 ʹ 150 000 or 1 350 00
It follows that,
Since, The ratio of accumulated depreciation and Fixed Asset͛s 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 there͛s OTHER CURRENT LIABILITIES which is to be valued at
100,000.

Working Capital ´  

   
  

´  uuuuu  uuuuu
´ uuuuuu

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

uuuuuu 
^
Thus, SHE = ´ ^uuuuu


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,


     
Earnings Per Share ´ ´ u
 

  
 uuuu  uuuu
´ ´ u
 

  

uuuu
´ ´ u
  

  
uuuu
´   

  
u
uuu ´   

  

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 received 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,
`   

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
  
 

 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,

^uuuuu 

Total Liabilities ´ ´ uuuuu

^

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

Given the formula

?

§ 
 

Times Interest Earned Ratio ´

 

And since
?

§ 
 

Times Interest Earned Ratio ´ ´à then,

 

 uuuu § 
 

´ ´à

 

 uuuu § 

´ à 



 
 uuuu ´ à 

  


 uuuu ´ 


Cost of Sales = Net Sales ʹ Gross Profit

= 3,000,000 ʹ 1,050,000
= 1,950,000
Inventory Turnover ´


´
! uuuu
´
   
 
Then The Projected Inventory Should be 1950 000/5 or 390 000
Financial Statement Ratios

  

Acid-Test Ratio ´
 
  


uuuuuu
´ ´à
uuuuu

 


Current Ratio ´
 
  


 uuuuu
´ ´½
uuuuu

?
   uuuu
Net Income on Net Sales ´ ´ ´ u
u
?
  ½uuuuuu

 
u uuuu
Gross Income Rate on Net Sales ´ ´
½
?
  ½uuuuuu

       uuuu
Ratio of Selling Expense to Net Sales ´ ´ ´

?
  ½uuuuuu
´
 
?
  ½uuuuuu
Accounts receivable Turnover ´ ´
   
    ^uuuuu

Inventory Turnover ´
 

´
! uuuu
´ times
   
 ½!uuuu

Composition of Quick Assets

Accounts Receivable 600, 000 60%

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

?
  ½uuuuuu
Asset Turnover = ´ ´ ´


 ½uuuuuu

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 Asset͛s Cost is

Accumulated Depreciation = 750 000 = 1 is to 3

Cost of the Fixed Asset 2 250 000

?

§ 
 
 uuuu  uuuu
Times Interest Earned Ratio ´ ´ ´à

 
 uuuu


       uuuu  uuuu
Earnings Per Share ´ ´ u
 

   uuu