CHAPTER 2: THE BASIC FINANCIAL STATEMENTS

Instructor’s Manual Problem Set

Solutions can be found in the accompanying Excel files. Note that if you wish to see all of the formulas at
once, you may use the CTRL+` (Control plus grave accent) shortcut key to toggle them on or off.

1. Using the data presented below for Blue Sky Inc.:

2017 2016
Sales $7,550,000 $6,150,000
Cost of Goods 5,750,000 4,550,000
Depreciation 120,000 100,000
Selling and G&A Expenses 820,000 730,000
Fixed Expenses 200,000 200,000
Lease Expense 150,000 150,000
Interest Expense 350,000 300,000
Tax Rate 40.00% 40.00%
Shares Outstanding 100,000 80,000
Cash 108,000 50,000
Marketable Securities 150,000 100,000
Accounts Receivable 450,000 350,000
Inventory 1,250,000 850,000
Prepaid Expenses 120,000 40,000
Plant & Equipment 5,350,000 4,800,000
Accumulated Depreciation 410,000 290,000
Long Term Investments 450,000 360,000
Accounts Payable 420,000 380,000
Notes Payable 150,000 100,000
Accrued Expenses 150,000 100,000
Other Current Liabilities 200,000 180,000
Long-term Debt 2,900,000 2,500,000
Common Stock 2,500,000 2,000,000
Additional Paid-in-Capital 600,000 500,000
Retained Earnings 548,000 500,000
a) Create Blue Sky’s income statement and balance sheet using formulas wherever possible. Each
statement should be on a separate worksheet. Improve the readability of the data by using the format
explained on page 49, so that Excel will display the numbers as if they had been divided by 1,000.
Make the appropriate note on the heading of each financial statement.
b) On another worksheet, create a statement of cash flows for 2017. All formulas should be linked
directly to the source on previous worksheets.
c) Using Excel’s outlining feature, create an outline on the balance sheet that, when collapsed, shows
only the subtotals for each section.

2. Using the data from the previous problem:

a) Create a common-size income statement and balance sheet for 2017 and 2016. These statements
should be created on a separate worksheet with all formulas linked directly to the income statement
and balance sheet.
b) Using the common-size income statement for 2017, create a forecasted income statement for 2018
assuming that each item is expected to remain in the same proportion as in 2017. The forecasted sales
for 2018 are $8,500,000.

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3. Using the data presented below:
Square Corp. Square Corp.
Income Statement Balance Sheet
For the Year Ended Dec. 31, 2017 ($ in 000's) As of Dec. 31, 2017 ($ in 000's)
2017 2016 Assets 2017 2016
Sales 7,250,000 6,750,000 Cash 149,970 100,000
Cost of Goods Sold 5,400,000 5,330,000 Accounts Receivable 370,000 347,000
Gross Profit ? ? Inventory 870,000 515,000
Selling and G&A Expenses 965,000 632,000 Total Current Assets ? ?
Depreciation ? 550,000 Plant & Equipment 6,570,000 5,010,000
EBIT 335,000 ? Accumulated Depreciation 1,930,000 1,380,000
Interest Expense ? 110,000 Net Fixed Assets ? ?
Earnings Before Taxes 205,000 ? Total Assets ? ?
Taxes ? ? Liabilities and Owners' Equity
Net Income 133,250 79,100 Accounts Payable 420,000 321,440
Notes Payable 166,625 22,960
Notes: Total Current Liabilities ? ?
Tax Rate ? ? Long-term Debt 1,350,000 918,400
Shares Outstanding 75,000 65,000 Total Liabilities ? ?
Earnings per Share ? ? Common Stock 2,520,000 2,043,440
Dividends per Share ? ? Additional Paid-in-Capital 772,000 551,040
Addition to RE per Share ? ? Retained Earnings 734,720 734,720
Dividend Payout Ratio 60% Total Shareholder's Equity ? ?
Total Liab. and Owners' Equity ? ?
a) Recreate the income statement and balance sheet by filling in the question marks with formulas. Each
statement should be on a separate worksheet. Try to duplicate the formatting exactly. Note that in
2016, 60% of earnings were paid to shareholders as dividends.
b) On another worksheet, create a statement of cash flows for 2017. Use formulas linked directly to the
source on previous worksheets instead of numbers.
c) Create a common-size income statement and balance sheet for 2017 and 2016. These statements
should be created on a separate worksheet with all formulas linked directly to the income statement
and balance sheet.
10 Chapter 2: The Basic Financial Statements
Instructor’s Manual Problem Set

4. Dragon Telecommunications Inc. wants to create forecasted financial statements for 2018 based
on its accounting data in 2017.

In 2017 total revenue was $1,550,000; cost of goods sold was $1,250,000; selling and G&A
expenses were $110,000; depreciation expense was $15,000; interest expense was $25,000; the
average tax rate was 35%, and the number of shares outstanding was 80,000.

Also, in 2017 Dragon had cash of $20,000; accounts receivable of $120,000; inventory of
$220,000; plant & equipment of $1,150,000 with an accumulated depreciation of $250,000.
Accounts payable, notes payable, long-term debt, common stock, additional paid-in-capital, and
retained earnings represented 7%, 0.5%, 20%, 44.5%, 12%, and 16% of total assets,
respectively.

For 2018, Dragon expects a 25% increase in total revenue, while cost of goods sold and selling
and G&A expenses are expected to remain at the same proportion of total revenue as in 2017.
Both total plant and equipment and depreciation expense will increase by 12%. Similarly, long-
term debt is forecasted and interest expense will increase by 20%, but the tax rate and the
number of shares outstanding will remain constant.

Additionally accounts receivable, inventory, accounts payable, and notes payable are expected
to increase 15%, while common stock and paid-in-capital will increase by 25%. The dividend
policy in 2018 will be based on a dividend payout ratio of 50%. In other words, 50% of
forecasted earnings will be paid to shareholders as dividends.
Using these projections, create the forecasted 2018 income statement, balance sheet, and statement of
cash flows for Dragon Telecommunications Inc. Each statement should be on a separate worksheet.