BASIC EDUCATION DEPARTMENT

SENIOR HIGH SCHOOL

Name: __________________________________________ Grade/Score:_____________________
Year and Section:_________________________________ Date:___________________________
Subject: Business Finance Teacher: ________________________
ACTIVITY: Performance Check 2
Reference: Business Finance by Arthur S. Cayanan and Daniel Vincent H. Borja
____________________________________________________________________________
ACTIVITY TITLE: Preparation of Projected Financial Statements
LEARNING TARGET:
1. Appreciate the importance of planning.
2. Know and apply the tools used in planning and forecasting
PROBLEM:
In January 2018, the president of RM Company, a merchandise trading company, wants to find out how much
cash dividends can be declared given the good performance in 2017. The company’s loan covenant, however,
states that the company’s current ratio cannot fall below 1.20. While the total debt-equity ratio was high in
2017, this ratio has to improve and cannot exceed 2.5 by the end of 2018. The president was initially planning
to recommend to the board the declaration of 60% of net income in 2017 as cash dividends in 2018. But
before he will finally decide, he requested you to prepare projected financial statements for the year 2018
PROJECTED FINANCIAL STATEMENTS
The statement of financial position as of December 31, 2017 and the statement of profit or loss for the year
ending December 31, 2017 are shown in Table 1 and Table 2 respectively.

Table 1: RM Company
Statement of Financial Position
December 31, 2017
Assets
Current Assets
Cash 500,000
Accounts Receivable 2,650,000
Inventories 3,250,000 6,400,000
Property, Plant, and Equipment 6,000,000
Less: Accumulated Depreciation 1,500,000 4,500,000
Total Assets 10,900,000
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable 1,425,000
Accrued Expenses Payable 1,665,000
Income Taxes Payable 210,000
Current Portion of Long-Term Debt 1,000,000 4,300,000
Long-term debt 4,500,000
Total Liabilities 8,800,000
Stockholders' Equity
Capital Stock 1,000,000
Retained Earnings 1,100,000 2,100,000
Total Liabilities and Stockholders' Equity 10,900,000
 Table 1: RM Company
Statement of Profit or Loss
As of December 31, 2017
Sales 25,000,000
Cost of Sales 15,000,000
Gross Profit 10,000,000
Operating Expenses
Variable 1,000,000
Depreciation 500,000
Other Fixed costs 7,500,000 9,000,000
Income before Interest and Taxes 1,000,000
Interest Expense 350,000
Income before Taxes 650,000
Income Taxes 195,000
Net Income 455,000

The following assumptions are made:

a. Sales to be projected for 2018 is an increase amount of 2017 Sales by ₱5 million. Gross profit margin
in 2017 will be maintained in 2018.
b. The following financial statement accounts are expected to vary with sales based on the 2017 financial
statements:
i. Variable operating expenses
ii. Cash
iii. Accrued expenses payable
c. Other fixed costs were unchanged.
d. Average collection period is expected to be 45 days. (Note: This is to project Accounts Receivable, see
formula provided on the answer sheet to compute)
e. Days’ inventories is expected to be 75 days. (Note: This is to project Inventories, see formula provided on the
answer sheet to compute)
f. Days’ payable is expected to be 30 days. (Note: This is to project Accounts Payable-Trade, see formula
provided on the answer sheet to compute)
g. The company is expected to buy a new equipment worth ₱1,000,000 on June 30, 2018. ₱300,000 will
be paid immediately and another ₱200,000 will be paid on December 31, 2018. The balance will be
paid on June 30, 2019. No interest will be charged for the unpaid balance. The company depreciates
their property, plant, and equipment over an average period of 10 years.
h. On June 30, 2017, the company borrowed ₱6 million from a bank with an annual interest rate of 10%.
Principal amount of ₱500,000 is paid every December 31 and June 30 plus interest.
i. The company will borrow on a short-term basis any additional financing requirements for 2018. For
purposes of forecasting, an additional interest expense of ₱20,000 will be provided for this short-term
loan.
j. Income tax rate is 30%. For 2018, 75% of the income taxes are expected to be paid in 2018 and the
balance is expected to be paid in 2019.

INSTRUCTIONS: (Follow strictly all instructions below, or else, your answers will not be considered.
1. Do not write any markings or writings on this test questionnaire.
2. Prepare a projected statement of profit or loss and a projected statement of financial position. Show all
supporting computations. Whenever applicable, round off amounts to the nearest peso. Use the answer
sheets provided for these requirements.
*** END OF TEST***