Supervisor: Prof.

Mahmoud Soliman MBA: Alexandria - C - E

Prepared by: Ahmed Elnaggar, 22127161 Fall 2022-Q1
Lec 2; Financial Accounting and Reporting: 5422
3- The Balance Sheet (Statement of Financial Position)
The balance sheet is a list of assets, liabilities, and shareholders’ equity of an accounting
entity (organization) at a particular point of time. The purpose of the balance sheet is to
report the financial position represented by the amount of assets, liabilities, and
shareholders’ equity.
Accounting Equation: Assets = Liabilities + Owner’s equity (SHE)
Case: Assets at 1/1/2020 $4,000,000 = 2,400,000 + 1,600,000
Assets at 12/31/2020 $5,000,000 = 2,800,000 + 2,200,000
1,000,000 = 400,000 + 600,000
The reasons for in SHE are: Issuing additional shares
Increase Income of the year
Dividends declared
If the company made no issuance & Dividends declared 700,000, What is the net
Income?
SHE = additional shares Issued + Net Income - Dividends declared
Net Income = 600,000 – 0 + 700,000 = 1,300,000
Elements of the balance sheet
3-1 Assets:
Are economic resources with probable future benefits owned or controlled by an entity as
a result of past transactions and can be measured in national monetary units.
Controlled: like Egypt Air releases 500 planes
3-1-1 Current Assets:
Assets which are turned into cash or used up within one year or the operating cycle
whichever is longer; Current assets include:
-Cash
-Short term investment in marketable securities
-Accounts receivable (AR): amount due on customers resulting from selling goods
or providing service on account (‫)حسابات العمالء‬
-Notes receivable (NR): Promises written between customers and other companies
and expected to be collected in the future (‫)أوراق القبض‬
Why Selling on account? high risk but increase sales
-Inventory: goods owned by company but not yet sold
-Supplies - Interest receivable
-Prepaid expenses (prepaid rent, prepaid insurance, ….)
Order of Liquidity: in same order from cash to prepaid
* Inventory is always classified as current asset even if takes more than one year to be sold.
3-1-2 Long Term Assets (Non-Current Assets); Non-Current assets include:
3-1-2-1 Long term investment in another company (Invest in securities)
Long term notes receivable (Shares or bonds)

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 3-1-2-2 Property, Plant, and Equipment (AKA Fixed Assets)
Assets which are acquired or constructed for the purpose of use in
business operations (not for resale to customers) and are expected to
provide their benefits for many years.
-Land (building is constructed) but if land for resale in the future called Investment in
Land)
-Building -Delivery equipment
-Office equipment - Cars and trucks (vehicles)
-Furniture - Machines
All of the fixed assets mentioned above are subject to depreciation except land.
3-1-2-3 Intangible fixed assets: are to be shown in balance sheet only if they
are purchased or acquired by another company, according to GAAP
Assets which have no physical substance but have probable future benefits.
-Patents -Franchises
-Copy rights -Trademarks
-Goodwill: must resulted from another company acquiring
Case: Company X acquired assets and assumed liabilities of Y company for 5,000,000
Assets and liabilities of Y Book value Fair market value
Assets 4,000,000 7,000,000
Liab. 1,500,000 1,500,000
Net assets at fair market value = 7,000,000 – 1,500,000 = 5,500,000
Goodwill = acquisition value – net asset at fair market value
= 5,000,000 - 5,500,000 = -500,000
If Goodwill is -ve >>> Acquisition gain for X
ABC buys the assets of XYZ for $40 instead of $70 million. ABC must record the $30 million
difference between the purchase price and the fair market as negative goodwill on its income statement.
3-2 Liabilities:
Are current obligations of the entity that result from past transactions which will be
settled by payment of cash, providing goods, or by providing services.
3-2-1 Current Liabilities (Short Term Liabilities)
Are obligations that will be settled by providing cash, goods, or services within the
coming year (one year from the date of the balance sheet) Current liabilities
include:
-Accounts payable: result from buying assets on account ≠ account receivable
-Accrued expenses payable (salaries payable, taxes payable, --)
-Notes payable: Promises written in the future & to be paid in the future
Result in investment expense
-Current maturity of long-term debt: Company X borrowed 2,000,000 as bank loan
at April 1, 2018 to be paid on 5 years in equal installments, on balance sheet,

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 under current liab. at 12/31/2018 bank loan (2,000,000/5)=400,000 ‫قسط مستحق الدفع خالل العام‬
under non-current liab.; 2,000,000 – (2,000,000/5) = 1,600,000 ‫باقي القرض‬
-Unearned revenue: cash received in advance for services not yet provided
3-2-2 Long Term Liabilities (Noncurrent Liabilities)
Liabilities that will be settled after one year from the date of the balance sheet.
When borrow from public or companies (Shares & bonds)
-Notes payable
-Long term Bank Loans
-Bonds Payable
3-3 Stakeholders’ Equity: (AKA: Shareholders ‘Equity, or Owners ‘Equity)
-Contributed capital (AKA: Common Stock, Capital Stock)
-Other Contributed Capital (AKA: Additional-Paid-in-Capital)
-Retained Earnings
 Sometimes the term net assets is used to refer to total stockholders’ equity since total
stockholders’ equity is measured as the difference between total assets and total
liabilities.
 On the balance sheet, most companies list assets in order of liquidity, liabilities in
order of maturity, and shareholders’ equity according to the order shown above.
Current Ratio = Total Current assets / Total current liab = CA / CL.
If current ratio =1.53, it means each $1 of current liab. is covered by $1.53 of current
assets
-Cash: Cash Ratio
-Short term investment in marketable securities Quick ratio
-Accounts receivable (AR)
-Notes receivable (NR)
Ratios to compare against Ratio of the company last year or ratio of industry current year
Which of the following assets is subject to depreciation?
a) Supplies → Current asset
b) Land → ‫ من صنع ربنا‬but building is constructed by human
c) Prepaid → Current asset
d) All
e) None
Operating revenue:
a) Unearned revenue → Liab.
b) Dividend’s income → non-operating revenue
c) Rent revenue → non-operating revenue
d) none
If a company borrow 200,000 cash and signed 3 years note that leads to:
a) Decrease in current ratio 3 years means it’s not current liab.
b) Increase in current ratio Before loan: CA / CL = 800,000 / 400,000 =2
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 c) No effect After loan: (800,000+200,000) / 400,000 = 2.5
Which of the following is the main users of financial statement?
a) Management c) Investors and Creditors
b) Government agencies d) All
Given following: 1/1/2020 12/31/2020
Assets 900,000 1,100,000
Liab. 500,000 600,000
By the end of year total, SHE: SHE = Assets – Liab. =
a) Increased by 2,000,000 (1,100,000 - 900,000) – (600,000 - 500,000) =
b) Increased by 100,000
c) Decreased by 100,000
If total SHE by the end of year decreased that necessarily means:
a) Company made loss SHE = additional shares Issued + Net Income - Dividends declared
b) No shares issued -100,000 = 200,000 + 100,000 – 400,000
c) No dividends declared
d) None

What is depreciation?
Depreciation is the process of allocating the depreciable cost of an asset to expense over
its estimated useful life in a rational and systematic manner.
Depreciation:
The matching requires that a portion of an asset’s cost be allocated as an expense in the
same period that revenues are generated by its use.
To calculate depreciation, three amounts are required for each asset:
 Cost of the asset: (actual cost) which represents all necessary expenditures to
acquire an asset and make it ready for the intended use.
Example for a machinery:
- Acquisition price
- Custom duties if imported
- Shipping and insurance while in shipping
- Transportation cost from the port to the company’s location
- Unloading cost
- Installation cost
- Testing cost before using the machine
 The estimated useful life of the asset to the company. It could be in number of
years or in units of output like machine hours, kilometers of a car or truck.
 The estimated salvage (residual) value at the end of the asset ’s useful life.
Allocating the depreciable cost = Actual Cost – salvage value
Alternative Depreciation Methods:
 First: Straight Line Depreciation (SLD)
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 Under SLD depreciation expense is equal for all years of useful
Annual depreciation expense = (cost – salvage value) / years of useful life
Case: Alex Corporation acquired a new machine during December 2013.

The machine was ready for use at January 1, 2014. The cost of the machine $130,000.
 The estimated useful life 5 years and the estimated salvage value $10,000.
So, annual depreciation exp.= (130,000 – 10,000) / 5 = $24,000
The difference between cost and the salvage value is termed the depreciable cost
 Depreciable rate = 1 / years of useful life → = 1/5 = 20%
 Depreciable cost = cost – salvage value
 Annual depreciation expense = depreciable cost * depreciable rate
Year Cost Dep. Exp. Accum. Dep Net book value
Acq. Date 130,000 - - 130,000
End year 1 130,000 24,000 24,000 106,000
2 130,000 24,000 48,000 82,000
3 130,000 24,000 72,000 58,000
4 130,000 24,000 96,000 34,000
5 130,000 24,000 120,000 10,000
120,000
 Accumulated dep = Sum of depreciation expenses
 Net book value (undepreciated cost at the particular time) is equal to cost of the
asset minus accumulated depreciation.
 Net Book value at date = Cost – accum. depreciation at that particular date
Rules; At the end of useful life:
 Accum. Dep. = Depreciable cost
 Net book value = The estimated salvage value
Case SLD: Machine Cost $ 270,000, estimated useful time 10 years, Savage value 20,000
1) What is dep. Exp. for 6 years
- Annual depreciation exp.= (270,000 – 20,000) / 10 = 25,000 for any useful life
2) What is the net book value of the machine at end 7th years?
- Accum. Value at end 7th year = 25,000 x 7 = 175,000
- Net book value at 7th years = 270,000 – 175,000 = 95,000
3) What is the net book value at end year 10?
- Apply rule, the net book value at end year 10 = 20,000
4) If the machine was sold at end of 4th year 140,000, what is gain or loss? (non-operating)
- Accum. Value at end of 4th year = 25,000 x 4 = 100,000
- Net book value at 4th years = 270,000 – 100,000 = 170,000
Gain / loss = Sale price – net book value = 140,000 – 170,000 = -30,000 (Loss of Sale)
5) Same Case: Assume that at end of 8th year the estimated useful life is adjusted to be 4
years, so total useful life will be 8 + 4 = 12
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 - Accum. Value at end 8th year = 25,000 x 8 = 200,000
- Net book value at 8th years = 270,000 – 200,000 = 70,000
- New annual dep. for years 9, 10, 11, 12 = (cost – salvage value) / years of useful life
= 70,000 – 20,000 / 4 = 12,500
 Second: Units of activity (units of production) Depreciation: SLD per units
Under this method, depreciation depends on usage of asset during particular period
The cost of the machine $130,000 and the estimated salvage value $10,000
Assume that the machine is estimated to work 200,000 machine hours during its
estimated useful. Also, assume that the actual usage as follows:
Year 1 45,000 hours
2 50,000 “
3 35,000 “
4 42,000 “
5 28,000 “
 Depreciation exp. for the particular period= Dep per unit * actual usage
Dep. per machine hour = (cost – salvage value) / Estimated useful life in units
= (130,000 – 10,000) / 200,000 hours = $0.6 per machine hour
Dep. for year 1= $0.6 * 45,000= 27,000
Year Cost Dep. Exp Accum. Dep. Net book value
Acq. Date 130,000 - - 130,000
End of year 1 130,000 27,000 27,000 103,000
2 130,000 30,000 57,000 73,000
3 130,000 21,000 78,000 52,000
4 130,000 25,200 103,200 26,800
5 130,000 16,800 120,000 10,000
120,000
Case: Truck cost $ 390,000, Useful life 300,000 Km, Savage value 30,000
Using units of activity dep.
Actual usage 1st year 50,000
nd
2 40,000
rd
3 55,000, What is dep. exp. For 3rd year?
- Dep. per Km = (390,000 – 30,000) / 300,000 = 1.2 per Km
- Dep. exp. For 3rd year = 55,000 x 1.2 = 66,000
What is the net book value at end of 3rd year?
- Accum dep. at end of 3rd year = (50,000 + 40,000 + 55,000) x 1.2 = 174,000
- Net book value = 390,000 – 174,000 = 216,000
 Third: Declining Balance depreciation (Accelerated depreciation) ‫اإلهالك المعجل‬
The idea here is to assign high depreciation for early years of useful than later years.
There are many reasons to declining balance depreciation:
 The asset is more efficient in early years (and low repairs exp)
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 The advancement in technology makes new assets are more efficient than old assets.
 Great way to reduce Taxes
 Dep year 1 ≥ dep. year 2 ≥ dep. year 3
 To apply DBD. We need the depreciation rate.
 The most common depreciated rate is twice (double) the straight-line rate.
If the years of useful are 5 years, then SLD Rate is 1/ 5= 20%
So double declining dep, rate will be 20% * 2 = 40%
Double declining rate = (1/ years of useful life) * 2 = (1/5) * 2= 40%
For all years of useful life except last year, depreciation is calculated based on the book
value of the asset at the beginning of the year
Year cost Dep. exp Accum dep. Net book value
Acq. date 130,000 - - 130,000
End 1 130,000 130,000* 40% = 52,000 52,000 78,000
2 130,000 78,000* 40% = 31,200 83,200 46,800
3 130,000 46,800* 40% = 18,720 101,920 28,080
4 130,000 28,080* 40% = 11,232 113,152 16, 848
5 130,000 16,848 – 10,000 = 6,848 120,000 10,000
120,000
 Depreciation expense for last year of useful life is calculated as the difference
between book value at the beginning of last year minus the estimated salvage value.
Case: Machine cost $250,000, useful life 8 years, estimated salvage value 20,000
Using double declining balance dep., what is dep. exp. for 3rd year?
- dep rate = 1/8 x 2 = ¼ = 25%
- dep. for 1st year = 250,000 x 25% = 62,500
- dep. for 2nd year = (250,000 – 62,500) x 25% = 187,500 x 25% = 46,875
- dep. for 3rd year = (187,500 – 46,875) x 25% = 35,156
net book value ‫ سنوات نحسب‬3 ‫لو تم بيعها بعد‬
 May be using different dep. method in same sheet

Notes:
 Accounts receivable net is the difference between accounts receivable balance and the
amount of doubtful accounts
 Notes receivable may be current asset or Noncurrent assets for long term, so if no
information given for notes receivable, the whole amounted is treated as current
assets
 Long term loan 400,000 (under current liab. (Current portion) 75,000 & noncurrent
liab. 325,000)
 Accrued expenses payable include expense for the accounting period but not yet paid
like salaries payable, interest payable, taxes payable.

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 For a service business, there will be no merchandise inventory. Also, one of the
current liabilities could be unearned revenues.
Case: Company X acquired a machine by paying 100,000 cash and signed a note of
150,000 for 3 years. The market value of the machine at year end 280,000.
Machine should be listed on balance sheet at end of the year 100+150=250,000
a) 100,000 b) 150,000 c) 280,000 d) none
Accounting Assumptions and Principles: related to the Balance sheet
i. Separate Entity Assumption:
Activities of the Co. must be accounted for separately from activities of its owners.
ii. Unit-of-measure assumption:
The business entity accounts for and reports its financial results in terms of the
national monetary unit (local currency)
iii. Historical Cost Principle: (Cost Principle)
Requires assets to be recorded at historical cost (original cost, actual cost) that is,
the cost on the date of the transaction which is the cash paid plus the current dollar
value of all non-cash considerations given in the exchange.
iv. Going-Concern Assumption:
A business entity is assumed to continue operating long enough to meet its
contractual commitments and plans. (Assets to be reported on balance sheet at cost,
however there some exceptions)
If a company is not expected to continue for likelihood of bankruptcy, its assets
and liabilities should be valued and reported on the balance sheet at liquidated
values)
Mid-term Exam Q1:
1) Under accrual basis of accounting, revenue is recognized when cash is received. X
When revenue is earned
2) Unearned revenue is considered a liability. √
3) If land was acquired 10 years ago with cost of $100,000 and its market value when
financial statements are prepared is $160,000, then it should be reported on the
balance sheet at $160,000. X reported at original cost 100,000
4) Matching principle applies to the matching of assets and liabilities. X
Matching of revenues and expenses
5) Shareholders' equity may increase if there is net loss. √
SHE = additional shares Issued + Net Income - Dividends declared (100 = 200 - 50 - 50)
6) The decrease in a liability account must cause equal decrease in assets. X
Assets = Liab. + SHE (Because decrease in liab. may be lead equal increase in
SHE)
7) All noncurrent assets are shown on balance sheet at net book value√ for land is the cost
8) Inventory is not considered quick asset for the purpose of calculating the quick
ratio√

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Q2: Choose the correct answer for each of the following:
1) Which of the following items would you expect to find in a correctly prepared
balance sheet at the end of the period?
a- Cash balance at the beginning of the period.
b- Net income for the period.
c- Retained earnings at the end of the accounting period. RE at SHE & balance
d- Expenses incurred during the period to earn revenues.
e- None of the above

2) Dividends declared but not yet paid:

a- Decrease assets. SHE = additional shares Issued + Net Income - Dividends declared
b- Decrease net income.
c- Decreases Stockholder's equity.
d-None of the above
3) Which of the following items appears on the income statement?
a- Dividends declared
b- Rent expense
c- service revenue
d- None of the above
4) The use of supplies previously purchased would:
a- Increase expenses & decrease assets
b- Decrease liabilities.
c- Increase assets.
d- All of the above.
5) Which of the following assets is subject to depreciation?
a- Supplies
b- Land
c- Building
d- All of the above
6) Use the following information to answer 6
Alex Corporation used a machinery with cost of $160,000, estimated useful life of
5 years, and estimated salvage value of $10,000: If the company uses SLD the net
book value at the end of useful life will be: 10,000
Question (3): The following balances appeared on records of Alex Serv Co. at 12-31-
2011
Cash $70,000 Accounts payable $ 50,000
Notes payable 55,000 Accounts receivable 100,000
Equipment (net) 270,000 Retained earnings 1/1/2011 190,000
Salaries expense 60,000 Bonds payable (1/1/2020) 100,000
Prepaid Advertising 20,000 Supplies expense 20,000
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Interest expense 5,000 Dividends declared 40,000
Supplies 30,000 Dividends payable 10,000

Contributed capital 250,000 Long term investment in Mobinil 150,000

Depreciation expense 15,000 Sales 500,000
Cost of sales 280,000 Selling and administrative expenses 40,000
Salaries payable 5,000 Short term marker table securities 60,000
Given that the income tax rate is 20%p and taxes to be paid next year
Required:
First: Prepare the income statement for the year 2011 to show gross profit, operating
income. Pretax income, and net income.
Second: Prepare the classified balance sheet of Alex Corporation at 12-31-2011 (Be sure
to classify assets into current and noncurrent and liabilities into current and noncurrent
Third: Compute the current ratio at 12-31-2011. If the average current ratio for the
industry for the year 2011 is 1.9, evaluate short term liquidity for the company.
Alex Service Co,
Income St.
End of the year 2011
Net sale 500,000
(-) cost of sale (280,000)
Gross profit 220,000
(-) Operation expenses
Salaries 60,000
Dep exp. 15,000
Selling and administrative expenses 40,000
Supplies exp. 20,000 (135,000)
Operating Income 85,000
Nonoperating
(-) Interest exp. 5,000
Pretax Income 80,000
(-) tax exp. 20% (16,000) 64,000
RE at end have to be calculated = 190,000 + 64,000 – 40,000 = 214,000
Alex Service Co,
Balance Sheet
At 12/31/2011
Assets
Current assets
Cash 70,000
Short term marker table securities 60,000
AR 100,000

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 Supplies 30,000
Prepaid adverting 20,000
Total Current assets 280,000
Non-current asset
Long term investment in Mobinil 150,000
Equipment (net) 270,000
Total non-current assets 420,000
Total assets 700,000

Liab.
Current Liab.
AP 50,000
NP 55,000
Dividends payable 10,000
Salaries payable 5,000
Taxes payable 16,000
Total current Liab. 136,000
Non-current Liab.
Bonds payable (1/1/2020) 100,000 100,000
Total Liab. 236,000
SHE
Contributed capital 250,000
RE 214,000 464,000
Total (Liab. + SHE) 700,000

Case: Balance sheet of Merchandising Business:

Cairo Corporation
Balance Sheet
At 12/31/2017
Assets:
Current Assets:
Cash 150,000
Short term marketable securities 100,000
Accounts receivable (net) 350,000
Notes receivable 70,000
Merchandise inventory 400,000
Supplies 30,000
Prepaid expenses 50,000

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Total current assets 1,150,000
Noncurrent assets:
Long term investment in X company 200,000
Land, building, equipment (net) 800,000
Goodwill 300,000
Total noncurrent assets 1,300,000
Total assets 2,450,000

Liabilities:
Current liabilities:
Accounts payable 180,000
Notes payable 90,000
Dividends payable 110,000
Current maturity of long term loan 80,000
Accrued expenses payable* 60,000
Total current liabilities 520,000
Noncurrent Liabilities:
Long term loan 200,000
Bonds payable (12%) 300,000
Total noncurrent liabilities 500,000
Total liabilities 1,020,000
Shareholders' Equity:
Common stock (Par value $20) 800,000
Additional paid-in capital 160,000
Retained earnings 470,000
Total shareholders' equity 1,430,000
Total liabilities and shareholders' equity 2,450,000
Comprehensive case for preparing financial statements:
ABC Corporation reported the following balances at 12/31/2016. On January 4, 2016, the
company issued 20,000 shares of common stock for a sale price of $12 per share.
Dividends declared during the year $150,000.
Cash $200,000 Common stock (100,000 shares) $500,000
Inventory 12/31/2016 400,000 Long term investment in Y 250,000
Supplies 50,000 Long term bank loan 400,000
Accounts payable 280,000 Accounts receivable 350,000
Equipment (at cost) 450,000 Accum. Dep. Equip. 120,000
Net sales 1,200,000 Dep.exp. equip 20,000
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Salaries exp 110,000 Cost of sales 650,000
Notes receivable 300,000 Supplies exp 40,000
Interest exp 30,000 general adm. Exp 130,000
Short term securities 150,000 Gains on sale of securities 20,000
Dividends income 40,000 Retained earnings 1/1/2016 680,000
Short term notes payable 100,000 Rent exp 60,000
Goodwill 200,000 Additional paid in capital 200,000
Additional information:
 Of the long-term bank loan, $75,000 is due at March 1, 2017
 A note receivable of $150,000 is due at January 1, 2019
 Income tax rate is 20%. Taxes will be paid next year.
Required:
1) Prepare the income statement for the year ended 12/31/2016
2) Prepare the shareholders' equity statement for the year ended 12/31/2016
3) Prepare the balance sheet at 12/31/2016
4) Compute the profit margin ratio
5) Compute the earnings per share
6) Compute the current and quick ratios

ABC Corporation
Income Statement
For the year ended 12/31/2016
Net sales 1,200,000
Less: Cost of sales (650,000)
Gross profit 550,000
Less: Operating expenses:
Salaries exp 110,000
Dep. Exp-Equip 20,000
Supplies exp 40,000
General adm. Exp 130,000
Rent exp 60,000 (360,000)
Operating income 190,000
Plus; Non-operating revenues and gains:
Dividend’s income 40,000
Gains on sale of securities 20,000
Less: Non-operating expenses and losses:
Interest exp (30,000) 30,000
Pretax income 220,000
Less: income tax exp (220,000 * 20%) (44,000)
Net income 176,000
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 ABC Corporation
Statement of Shareholders' Equity
For the year ended 12/31/2016
CS ADIC RE Total
Beginning balance 400,000 60,000 680,000 1,140,000
Issuance of shares 100,000 140,000 240,000
Net income 176,000 176,000
Dividends declared (150,000) (150,000)
Ending balance 500,000 200,000 706,000 1,406,000

Notes:
For the shares issued during the year: (20,000 shares * 12= 240,000)
Common stock = 20,000 * par value $5= 100,000
Additional paid in capital = 20,000 * (12 – 5) = 140,000
The balances given for common stock and additional paid in capital at 12/31/2016 are the
balances after the issuance of the 20,000 shares, therefore,
Common stock at the beginning = 500,000 -100,000= 400,000
Additional paid in capital at the beginning= 200,000 – 140,000 = 60,000
ABC Corporation
Balance Sheet at 12/31/2016
Assets;
Current assets:
Cash 200,000
Short term securities 150,000
Accounts receivable 350,000
Notes receivable 150,000
Inventory 400,000
Supplies 50,000
Total current assets 1,300,000
Noncurrent assets:
Long term notes receivable 150,000
Long term investment in Y 250,000
Equipment (net) 450,000 – 120,000 330,000
Goodwill 200,000
Total noncurrent assets 930,000
Total assets 2,230,000
Liabilities:
Current liabilities:
Accounts payable 280,000
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Short term notes payable 100,000
Current maturity of long-term bank loan 75,000
Income tax payable * 44,000
Total current liabilities 499,000
Noncurrent liabilities:
Long term bank loan 325,000
Total noncurrent liabilities 325,000
Total liabilities 824,000
Shareholders' equity:
Common stock 500,000
Additional paid in capital 200,000
Retained earnings 706,000
Total shareholders' equity 1,406,000
Total liabilities and shareholders' equity 2,230,000

Income tax payable is the amount of income tax expense because it will paid next year.
Ratios:
Profit margin = net income / net sales = 176,000 / 1,200,000 = 14.67%
Earnings per share (EPS)= net income / Average number of outstanding shares
Because the new shares were issue a t January 4,2016, therefore, the new shares are
treated to be staying all year.
EPS = 176,000 / 100,000 = $1.76 per share
Current ratio = Total current assets / Total current Liabilities
= 1,300,000 / 499,000
= 2.6 times

Quick ratio = Quick assets / total current liabilities

Quick assets are the assets which are expected to be converted to cash quickly
They include cash, short term investments, AR, and short-term NR.
So, quick assets do not include inventory, supplies, and prepaid expenses
Quick ratio = (200,000+150,000+350,000+150,000) / 499,000
= 1.7 times

Use balance sheet to draw some ratios:

 Current ratio
 Quick ratio

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