RHEENA B.

DELOS SANTOS
BSBA-1A (FM2)

MODULE I
REVIEW OF FINANCIAL STATEMENTS AND ITS ANALYSIS

I. LEARNING ACTIVITIES

Activity 1. Determination of Profitability and Preparation of Income Statement.

The Arizona Book Company sola 1,400 finance text books for $84 each to High Tuition University in
2019. These books cost Arizona $63 each to produce. Arizona spent $2,000 selling expense to
convince the university to buy its books. In addition, Arizona borrowed $50,000 on January 1, 2019,
on which the company paid 10% interest. Both interest and principal of the loan were paid on
December 31, 2019. Arisona’s tax rate is 20%. Depreciation expense for the year was $5,000. Didi
Arizona Cook Company make a profit in 2019? Kindly verify with an income statement presented in
good form.

Arizona Book Company

Income Statement
For the Year Ended, December 31, 2019

Sales (1,400*$84) $117,600

Cost of Goods Sold (1,400*$63) (88,000)

Gross Profit 29,400

Selling Expense (2,000)

Amortization Expense (5,000)

Operating Profit 22,400

Interest Expense (5,000)

Earnings before taxes 17,400

Taxes (20%) (3,480)

Earnings after taxes $ 13,920

Activity 2. Identify whether each of the following items increases or decreases cash flow:
 1. Increase in accounts receivable Decreases cash flow
2. Increase in notes payable Increases cash flow
3. Depreciation Expense Increases cash flow
4. Increase in investments Decreases cash flow
5. Decrease in accounts payable Decreases cash flow
6. Decrease in prepaid expense Increases cash flow
7. Increase in inventory Decreases cash flow
8. Dividend payment Decreases cash flow
9. Increase in accrued expense Increases cash flow
10. Increase in long-term investment Decreases cash flow

Activity 3. Earnings per share and retained earnings

Harry Company has an operating profit of P200,000. Interest Expense for the year was 10,000;
preferred share dividends paid were P18,750; and common share dividends were 30,000. The tax was
61,250. Harry Company has 20,000 shares of common share outstanding.

a. Calculate the earnings per share and the common dividends per share for harry Company.
b. What is the increase of retained earnings for the year?

A.

Operating Profit 200,000

Less: Interest Expense (10,000)
Earnings before taxes 190,000
Less: Taxes (61,250)
Earnings after taxes 128,750
Less: Preferred dividends (18,750)
Available to common stockholders 110,000
Less: Common dividends (30,000)
Increase in retained earnings $ 80,000

Available to common stockholders

Earnings per share = B. Increase in Retained Earnings
# of common shares outstanding
= $80,000
110,00 = $5.50
Earnings per share = 0
20,000

Common dividends
Dividends per share =
# of shares outstanding

Dividends per share =

30,000 = $1.56
20,000
Activity 4. Determining Book Value

Brother Company has an assets of $1,900,000, current liabilities of $700,000 and long-term
liabilities of $580,000. There is $170,000 in preferred stock outstanding; 30,000 shares of common
stock have been issued. Compute the book value per share.

Total assets $ 1,900,000

Less: Current Liabilities (700,000)
Less: Long-term Liabilities (580,000)
Stockholders’ Equity 620,000
Less: Preferred Stocks (170,000)
Net worth assigned to common 450,000
Common shares outstanding (30,000)
Book value per share $ 15.00

MODULE II
FINANCIAL ANALYSIS

II. LEARNING ACTIVITIES

Activity 1. Determining Profitability

1. Gaddy’s Company has $800,000 in assets and $200,000 of debt. It reports net income of $100,000.
a. What is the return on assets?
b. What is the return on stockholders’ equity?

A.
Net income
Return on assets =
Total assets

100,000
Return on assets = = 12.5 %
800,000

B.
Net income Stockholders’ Equity = Total assets – Total debt
Return on equity =
Stockholders’ equity
Stockholders’ Equity = 800,000 – 200,000

Stockholders’ Equity = 600,000

100,000
Return on equity = = 16.7 %
600,000
 2. Bass Company is considering expanding into a new product line. New assets to support this
expansion will cost $1,200,000. Bass estimates that it can generate $2million in annual sales, with a
5 percent profit margin. What would net income and return on assets (investment) be for the year?

Sales = $2,000,000
Profit Margin = (Net income/sales)
0.05 = (Net income/2,000,000)
Net income = 2,000,000*0.05
Net income = $100,000

Return on assets = (Net income/Total assets) *100

= (100,000/1,200,000) *100
= 0.0833*100
Return on assets = 8.33 %

3. Hally Snore, INC., has an asset of $400,000 and turns over its assets 1.5 time per year. Return on
assets is 12 percent. What is the profit margin (return on sales)?

Asset Turnover = Sales/Total assets

1.5 = Sales/400,000
Sales = $600,000

Return on Asset = Net income/Total assets

0.12 = Net income/400,000
Net income = $48,000

Profit margin = (Net income/sales)

= 48,000/600,000
= 0.08
Profit Margin = 8%

4. Baker Oats had and asset turnover of 1.6 times per year.
a. If the return on total assets (investment) was 11.2 percent, what was Bakers’ profit margin?
b. The following year, on the same level of assets, Baker’s assets turnover declined 1.4 times and
its profit margin was 8%. How did the return on total assets change from that of the previous
year?

A.
Total asset turnover*Profit margin = Return on total assets
1.6 * ? = 11.2 %

Profit Margin = 11.2% / 1.6 = 7.0%

B.
1.4*8% = 11.2%

 It did not change at all because the increase in profit margin made up for the decrease
in the asset turnover.
Activity 2. Trend Analysis

Company Date Industry Data on

Year Net Income Total Assets Net Income/Total Assets
201
8 350,000 2,800,000 11.50%
201
9 375,000 3,200,000 8.40%
202
0 375,000 3,750,000 5.50%

Industry Data on
Year Debt Total Assets Debt/Total Assets
201
8 1,624,000 2,800,000 54.10%
201
9 1,730,000 3,200,000 42%
202
0 1,900,000 3,750,000 33.40%

 As an industry analyst comparing the firm to the industry, you are more likely to praise or
criticize the firm in terms of
a. Net income /Total Assets?
b. Debt/Total Assets?

A. Net income/Total assets

Year Company Ratio Industry Ratio
2018 12.50% 11.50%
2019 11.70% 8.40%
2020 10% 5.50%

 Although the company has shown a declining return on assets since 2018, it has performed mush
better than the industry. Praise may be more appropriate than criticism.

B. Debt/Total Assets
Year Company Ratio Industry Ratio
2018 58% 54.10%
2019 54.10% 42%
2020 50.70% 33.40%

 While the company’s debt ratio is declining, it is not declining nearly as rapidly as the industry ratio.
Criticism may be more appropriate than praise.

Activity 3. Using ratios to Construct Financial Statement.

Greg Company has credit sales of $1,200,000. Given the following ratios, fill in the balance sheet below.
Total assets turnover 2.4 times
Cash to Total assets 2.50%
Accounts Receivable Turnover 8.0 times
Inventory Turnover 10 times
 Current ratio 2 times
Debt to total asset 61.00%

Greg Company
Statement of Financial Statement

Assets Liabilities & Stockholders' Equity

Cash   12,500 Current Debt  141,250
Accounts Receivable  150,000 Long-term Debt  163,750
Inventory  120,000 Total Debt  305,000
Fixed Assets  217,500 Equity  195,000
Total debt and
Total Assets  500,000 Stockholders Equity  500,000

MODULE III
FINANCIAL FORECASTING

III. LEARNING ACTIVITIES

Activity 1. Preparing Sales Projection

1. ER Medical Supplies had sales of 2,000 units at $160 per unit last year. The marketing manager
projects a 25% increase in unit volume this year with a 10 percent price increase. Prepare a sales
projection for this year.

ER Medical Supplies
Unit Volume ( 2,000 * 1.25) 2,500
Price (160*1.10) $ 176
Total Sales $440,000
Returns (6%) 22,000
Net Sales $418,000

2. Gibby Manufacturing Corporation expects to sell the following number of units of steel cables at the
prices indicated under three different scenarios in economy. The probability (likelihood to occur) of
each outcome is indicated. Prepare a sales projection.

Product Probability Units Price Total Volume Expected volume

A 0.20 100 $20 2,000 400
B 0.50 180 25 4,500 2,250
C 0.30 210 30 6,300 1,890
Total Expected Value: $4,540
 Activity 2. Activity 2. Preparing Production Requirement

1. Sales for Roxxy Sports Equipment are expected to be 4,800 units for the coming month. The
company likes to maintain 10 percent of unit sales for each in ending inventory. Beginning inventory
is 300 units. How many units should the firm produce for the coming month?

Projected Sales 4,800 units

Desired Ending Inventory 480 (10%*4,800)
Beginning Inventory 300
Units to be Produced 4,980

2. Digital Incorporation sales of 6,000 units in March. A 50% increase is expected in April. The
company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning
inventory for April was 200 units. How many units should the company produce in April?

Projected Sales 9,000 (6,000*1.5)

Desired Ending Inventory 450 (5%*9,000)
Beginning Inventory 200
Units to be Produced 9,250

Activity 3. Cost of Goods Sold

1. On December 31, 2019, Bart Company had an inventory 600 units of its product, which cost $28
per unit to produce. During 2020, Bart produced 1,200 units at a cost of $32 per unit. Bart Company
sold 1,500 units in 2020. Prepare the cost of goods sold for the year 2020.

Bart Company

Cost of Goods sold on 1,500 units

Old Inventory
Quantity (units) 600
Cost Per Unit $ 28
Total $ 16,800
New Inventory
Quantity (units) 900
Cost Per Unit $32
Total $ 28 800
Total Cost Goods Sold $ 45,600

2. At the end of January, Lemon Auto parts had an inventory of 825 units which cost $12 per unit to
produce. During February, the company produced 750 units at a cost of 16 per unit. The firm sold
1,050 units in February. Prepare the cost of goods sold

Lemon Auto Parts

Cost of Goods sold on 1,050 units
Old Inventory
Quantity (units) 825
Cost Per Unit $ 12
Total $ 9,900
New Inventory
 Quantity (units) 225
Cost Per Unit $ 16
Total $ 3,600
Total Cost Goods Sold $ 13,500
Activity 4. Determining Gross Profit and Ending Inventory

1. Converse Company produces a product with the following costs as of July 1, 2019:
Material $6
Labor 4
Overhead 2

Beginning inventory at these costs on July 1 2019 was 5,000 units. From July 1 to December 31, Converse
produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor and overhead were
the
Converse Company

Sales (17,000*$20) $340,000

Cost of Goods sold on 17,000 units
Old Inventory
Quantity (units) 5,000
Cost Per Unit $ 12
Total $60,000
New Inventory
Quantity (units) 12,000
Cost Per Unit $ 16
Total $192,000
Total Cost Goods Sold $252,000
Gross Profit $88,000
same with that of the beginning inventory. Converse uses the FIFO inventory system.

Assuming Value of Ending Inventory Converse

sold 17,000 units during
Beginning inventory $ 60,000
the last six months for
the year 2019 Total production (15,000*16) $240,000 at $20 each.
Determine the gross
profit and Total inventory available for sale $300,000 cost of
ending Cost of goods sold (252,000) inventory.
Ending inventory $ 48,000
 Jerico Company

Sales (31,500*$29.60) $932,400

Cost of Goods sold on 17,000 units
Old Inventory
Quantity (units) 7,000
Cost Per Unit $ 18.10
Total $126,700
New Inventory
Quantity (units) 24,500
Cost Per Unit $ 22.50
Total $551,250
Total Cost Goods Sold $677,950
Gross Profit $254,450

2. Jerico Company had a beginning inventory of 7,000 units on January 1, 2019. The cost associated
with the inventory were; Materials, $9 per unit; Labor, $5 per unit; Overhead, $4.10 per unit. During
2019, Jerico produced 28,500 units with the following cost: Materials, $11.50 per unit; Labor, $4.80
per unit; Overhead, $6.20 per unit.

Sales for the year were 31,500 units at $29.60 each. Jerico uses FIFO inventory system. Determine
the gross profit and cost of ending inventory.
 Activity 5. Schedule of Cash Receipts
1. Monica’s Flower Shops has forecast credit sales for the fourth quarter of the year as:
September (actual) $70,000
Fourth Quarter:
Value of Ending Inventory October
60,000
Beginning inventory (7,000*18.10) $126,700 November
55,000
Total production (28,500*22.50) $641,250 December
80,000
Experience has Total inventory available for sale $767,950 shown that
30% of sales are collected in
Cost of goods sold (677,950)
the month of sale, 60% in
the following month, and
Ending inventory $ 90,000
10% are never collected.
Prepare the schedule of cash receipts for Monica’s Flower Shops covering the fourth quarter of the year 2020.

Monica’s Flower Shop

Cash Receipts Schedule

2. Pirata Video Company has made the following sales projections for the next six months. All sales
are credit sales.
March 24,000 June 28,000
April 30,000 July 35,000
May 18,000 August 38,000

Sales in January and February were $27,000 and $26,000, respectively. Experience shown that of total sales,
10% are uncollectible, 30% are collected in the month of sale, 40% are collected in the following month, and
20% are collected two months after sale.

September October November December

Credit sales $70,000 $60,000 $55,000 $80,000
30% collected in month
18,000 16,500 24,000
of sales
60% collected in month
42,000 36,000 33,000
after sales
Total cash receipts $60,000 $52,500 $57,000
Prepare a monthly cash receipts schedule for the firm for March through August.

Of the sales expected to be made during the six months from March through August, how much will still be
uncollected at the end of August? How much of this is expected to be collected later?

Pirata Video Company

Cash Receipts Schedule

January February March April May June July August

Sales $27,000 $26,000 $24,000 $30,000 $18,000 $28,000 $35,000 $38,000

Collections (30%
7,200 9,000 5,400 8,400 10,500 11,400
of current sales)
Collections (40%
of prior month’s 10,400 9,600 12,000 7,200 11,200 14,000
sales)
Collections (20%
of sales 2 5,400 5,200 4,800 6,000 3,600 5,600
months earlier)
Total cash
$23,000 $23,800 $22,200 $21,600 $25,300 $31,000
receipts

Still due (uncollected) in August:

Bad debts: ($24,000 + 30,000 + 18,000 + 28,000 + 35,000 + 38,000) * .1 = (173,000) * .1 = $17,300
To be collected from August sales: ($38,000 * .60) = $22,800
To be collected from July sales: ($35,000 * .20) = $7,000
$17,300 + $22,800 + $7,000 = $47,100 due
Expected to be collected: $47,100 due - $17,300 bad debts = $29,800 to be collected

Activity 6. Schedule of Cash payment

1. The Elly Corporation has forecast the following sales for the first seven months for the year:
January 12,000 May 12,000
February 16,000 June 20,000
March 18,000 July 22,000
April 24,000

Monthly materials purchased are set equal to 20% of forecasted sales for the next month. Of the total
material costs, 40% are paid in the month of purchase and 60% in the following month. Labor costs will run
$6,000 per month and fixed overhead is $3,000 per month. Interest payments on debt will be $4,500 for
both March and June. Finally, Elly sales force will receive a 3% commission on total sales for the first six
months of the year, to be paid on June 30. Prepare a schedule of cash payments from January through
June.
Elly Corporation
Cash Receipts Schedule
Dec. January February March April May June July
$12,00
Sales $12,000 $16,000 $18,000 $24,000 $20,000 $22,000
0
Purchases (20% of
2,400 3,200 3,600 4,800 2,400 4,000 4,400
next month’s sales)
Payment (40% of
1,280 1,440 1,920 960 1,600 1,760
current purchases)
Material payment (60%
of previous month’s 1,440 1,920 2,160 2,880 1,440 2,400
purchases
Total payment for
2,720 3,360 4,080 3,840 3,040 4,160
materials
Labor costs 6,000 6,000 6,000 6,000 6,000 6,000
Fixed overhead 3,000 3,000 3,000 3,000 3,000 3,000
Interest payments 4,500
Sales commission (3%
0f $102,000)
$12,04
Total payments $11,720 $12,360 $17,580 $12,840 $20,720
0