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5. Balance sheet changes.
Figures in millions
a.
Year 1
Noncurrent assets = Total assets – Current assets
Total liabilities and owners’ equity = Total assets
Owners’ equity = Total liabilities and owners’ equity – (Current liabilities + Noncurrent
liabilities)
Current assets/current liabilities
Year 2
Total assets = Total liabilities and owners’ equity
Current assets = Total assets – Noncurrent assets
Currrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Noncurrent liabilities
Current assets/current liabilities
Year 3
Total assets = Current assets + Noncurrent assets
Total liabilities and owners’ equity = Total assets
2-1
Current liabilities = Current assets/(Current assets/current liabilities)
Noncurrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Current liabilities
Year 4
Current assets = Current liabilities × (Current assets/current liabilities)
Total assets = Current assets + Noncurrent liabilities
Total liabilities and owners’ equity = Total assets
Noncurrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Current liabilities
End-of-year for balance sheet items Year 1 Year 2 Year 3 Year 4
b.
The noncurrent assets (fixed assets)-to-current assets ratio stayed remarkably constant over the four-year
The noncurrent liabilities-to-owners equity ratio kept increasing, from 1.05 (Year 1) to 1.52 (Year 4). This
2-2
6. Reconstructing an income statement.
Year 1
Gross profit = Sales – Cost of goods sold
Operating profit = Gross profit – (Administrative and selling expenses + Research and
development expenses)
Earnings before interest and tax (EBIT) = Operating profit
Earnings before tax (EBT) = Earnings before interest and tax (EBIT) + Interest income
Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
Year 2
Sales = Earnings after tax + Income tax expense – Interest income + Research and development
expenses + Administrative and selling expenses + Cost of goods sold
Gross profit = Sales – Cost of goods sold
Operating profit = Gross profit – (Administrative and selling expenses + Research and
development expenses)
Earnings before interest and tax (EBIT) = Operating profit
Earnings before tax (EBT) = Earnings before interest and tax (EBIT) + Interest income
2-3
Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
Year 3
Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) – Interest income
Operating profit = Earnings before interest and tax (EBIT)
Gross profit = Operating profit + Administrative and selling expenses + Research and
development expenses
Cost of goods sold = Sales – Gross profit
Year 1 Year 2 Year 3
Earnings before interest
and tax (EBIT)
2-4
7. Reconstructing an income statement.
Year 1
Gross profit = Sales – Cost of goods sold
Operating profit = Gross profit – Administrative and selling expenses
Earnings before interest and tax (EBIT) = Operating profit
Earnings before tax (EBT) = Earnings before interest and tax (EBIT) – Interest expense
Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
Year 2
Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) + Interest expense
Operating profit = Earnings before interest and tax (EBIT)
Gross profit = Operating profit + Administrative and selling expenses
Sales = Gross profit + Cost of goods sold
Year 3
2-5
Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) + Interest expense
Operating profit = Earnings before interest and tax (EBIT)
Gross profit = Operating profit + Administrative and selling expenses
Cost of goods sold = Sales – Gross profit
Year 1 Year 2 Year 3
Administrative and selling
Earnings before interest
and tax (EBIT) 939 750 585
Interest expense 75 90 81
Earnings before tax (EBT) 864 660 504
Income tax expense 324 252 192
8. Reconstructing a balance sheet.
2-6
Beginning
of year
End
of year
Assets
Current assets
9. Constructing income statements and balance sheets.
VideoStores
Income Statement
For period ending 12/31/10
In thousands
VideoStores
Balance Sheets
December 31, 2009 and 2010
In thousands 12/31/09 12/31/10
A ssets
Liabilities and owners’ equity
2-8
10. Forecasting financing needs.
a.
Financing needs = Capital expenditures + Increase in current assets
b.
Part of the $4 million of financial needs will come from the expected increase in accounts payable and in
owners’ equity. Since other current liabilities are expected to stay at the same level, the remaining
difference is the extra borrowing needed at the end of next year.
2-9
