Comprehensive Problem The accounting department of Whitelands, Inc. is forecasting its 2017...

Question:

Comprehensive Problem The accounting department of Whitelands, Inc. is forecasting its 2017 income statement and balance sheet at the end of 2016. The department compiled the following assumptions about 2017.

1. Whitelands will generate a 15% operating retum on total assets.

2. Inventory, accounts payable, and cost of goods sold will increase by 10% from their 2016 3. Sales revenue and accounts receivable will also increase by 10% from their 2017 amounts.

4. The firm will purchase land for $150,000 with funds borrowed from a bank at 10% interest. The land will be used for a future building site.)

5. Other operating expenses will increase to $650,000, due to a planned employee wage increase.

6. The income tax rate will remain at 40%.

7. Whitelands will pay a dividend of $50,000.

8. The accrued liabilities account will be used to balance the balance sheet.

Required

(1) Use the above information along with the 2016 financial statements (below) to forecast the 2017 income statement and balance sheet The dollar amounts are in thousands and rounded to the nearest thousand dollar amount).

Income Statements

2017 2016
Sales revenue 2000
Less: Cost of goods sold 1200
Gross profit 800
Operating expenses: blank blank
Depreciation expense 100
Other operating expenses 620
Income from operations 80
Interest (financing) expense 0
Pretax income 80
Income tax expense (40%) 32
Net income 48
Balance Sheets
1213117 12131/16
Assets
Cash 70
Accounts receivable, net 60
Inventory 120
Total current assets 250
Property, Plant and Equipment
Land 0
Equipment (at cost) 1000
Less: accumulated depreciation (500)
Equipment, net of accumulated depreciation 500
Total Assets 750

FINANCIAL STATEMENT:

Financial Statement shows the financial status of a company.This may affect the future operations and performance of an entity. In this problem, two types of financial statements are present such as the Income Statement and Balance Sheet. Income statement will show the financial performance of a company. While, the Balance Sheet shows the financial standing.

Answer and Explanation:

The effects of the following assumptions in the Income Statement and Balance Sheet of Whitelands, Inc:

1. Whitelands will generate a 15% operating return on total assets.

Return on Total Assets is computed by dividing the Net Income over the Average Total Assets. In this case, due to a lack of information, the ROA cannot be determined.

2. Inventory accounts payable, and cost of goods sold will increase by 10% from their 2016.

The 2016 Inventory and Cost of Goods Sold are 120 and 1,200 respectively. Because of this assumption, the 2017 Inventory and COGS are 132 and 1,320, respectively.

3. Sales revenue and accounts receivable will also increase by 10% from their 2017 amounts.

There's a typo error in this problem for the year to be used (2017- this should be 2016).

The 2016 sales revenue and Accounts Receivables are 2,000 and 60, respectively. Because of this assumption, the 2017 Sales Revenue and Accounts Receivables are 2,200 and 66, respectively.

4. The firm will purchase land for $150,000 with funds borrowed from a bank at 10% interest. The land will be used for a future building site.)

The land will be added under Non-current Asset amounting to this amount. Interest will be charged on December 31, 2017.

5. Other operating expenses will increase to $650,000, due to a planned employee wage increase.

Increase Operating Expenses from 620 in 2016 to 650 in 2017.

6. The income tax rate will remain at 40%.

The same Tax Rate will be applied in 2017.

7. Whitelands will pay a dividend of $50,000.

The dividend will have a negative effect on the Retained Earnings.

8. The accrued liabilities account will be used to balance the balance sheet.

This cannot be determined due to a lack of information.

Balance Sheet has three main components such as the Assets, Liabilities, and Equity. In this problem, only the total assets were being presented. Forecasting the 2017 Balance Sheets of Whitelands, Inc. will be difficult to determine with a lack of information.


Learn more about this topic:

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How to Make an Income Statement: Example & Analysis

from Accounting 201: Intermediate Accounting I

Chapter 5 / Lesson 6
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