# Preparation of Income Statement and Balance Sheet with the help of Financial Ratios

Sometimes examination questions may require the candidates to prepare financial statements with the help of a given set of financial ratios. In these cases at least one item is given in monetary terms and is used as the starting point in the process of preparing financial statements. The process begins with the identification and use of that ratio which includes the given numerical item and then proceeds with the numerical values of item given in the question and new item calculated by interpolating the figures of the first ratio.

## Solved Example 1:

The following ratios relate to a sole proprietorship Bestworth Deals for the year ending 31 March 2015.

(i) Inventory turnover = 6 times

(ii) Trade receivables collection period = 2 months

(iii) Trade payables payment period = 73 days

(iv) Gross profit ratio (as a percentage of sales) = 20.0%

(v) Gross profit = \$60000

(vi) Profit for the year as a percentage of sales = 6.3%

(vii) Non-current assets turnover = 5 times

(viii) Current ratio = 2.1:1

Required:

Prepare an income statement and balance sheet in as much details as possible.

Solution:

Bestworth Products

Income Statement for the year ended 31 March 2015

Bestworth Deals

Balance Sheet as at 30 June 2015

## Solved Example 2:

The following information is related to Muaz Ahmad for the year ending 31 December 2015:

(i) Inventory turn over rate (based on closing stock/inventory) = 1.25 times

(ii) Trade receivables turn over rate (days) = 180 days

(iii) Trade payables turnover rate (days) = 144 days

(iv) Gross profit ratio = 25.0% of sales

(v) Administration expenses = 9.0% of sales

(vi) Distribution expenses = 6.0% of sales

(vii) Interest on 10% loan = ?

(viii) Net profit ratio = 5.0% of sales

(ix) Return on total assets = 5.0%

(x) Non-current assets turnover = 1.25 times

(xi) Current ratio = 2.5:1

(xii) Sales (all on credit) = \$100000

Required:

Prepare an income statement for the year ending 31 December 2015 and a balance sheet at that date in as much detail as possible.

You may also assume that there are 360 days in a year.

Solution: