Identifying Financial Statement Relations And Partial Foreca ✓ Solved

1015 Identifying Financial Statement Relationspartial Forecas

Determine the amount of each of the following items for Watson Corporation:

1. Dividends declared and paid during Year 1
2. Depreciation expense for Year 1 assuming that Watson Corporation neither sold nor retired depreciable assets during Year 1
3. Inventories at the end of Year 2
4. Interest expense on borrowing during Year 2, with an interest rate of 7 percent
5. Other current liabilities at the end of Year 2
6. Property, plant, and equipment at the end of Year 3 assuming that Watson Corporation neither sold nor retired depreciable assets during Year 3
7. Retained earnings at the end of Year 3
8. Long-term debt at the end of Year 3
9. The income tax rate for Year 4
10. Purchases of inventories during Year 4

Paper For Above Instructions

To provide a comprehensive forecast of financial statements for Watson Corporation, it is essential to analyze various key components that will affect the overall financial performance. Below, the calculations corresponding to the required items are discussed in detail, offering insights and rationale for each determination.

Dividends Declared and Paid During Year 1

To determine the dividends declared and paid during Year 1, we will examine Watson’s retained earnings from Year 0 to Year 1. This can be achieved by calculating the change in retained earnings, adjusting for net income from Year 1 and any additional stock issuances. Assuming the net income for Year 1 is known from the income statement, we can establish that:

Dividends = Retained Earnings (Year 0) + Net Income (Year 1) - Retained Earnings (Year 1)

Given the absence of explicit figures in the presentations, once we have these values, it will be straightforward to calculate the declared and paid dividends.

Depreciation Expense for Year 1

Depreciation expense can be determined using the straight-line method, which is commonly applied in financial statements, especially if no selling or retiring of assets occurred. Assuming we have the original cost and useful life of the depreciable assets:

Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life

This formula will yield the annual depreciation expense recognized during Year 1.

Inventories at the End of Year 2

Inventories at the end of Year 2 can be assessed through the inventory turnover ratio and the sales data from the income statement. We can use the following formula to derive the ending inventory:

Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold (COGS)

Again, specific figures from the statement will be critical to this calculation.

Interest Expense on Borrowing During Year 2

The interest expense can be calculated based on the long-term debt reported in the balance sheet. If the total debt is available, we will apply the interest rate as follows:

Interest Expense = Total Borrowings x 0.07

This simple calculation will provide the interest expense incurred during Year 2.

Other Current Liabilities at the End of Year 2

To ascertain the other current liabilities at the end of Year 2, we refer to the liabilities presented on the balance sheet. This will include amounts for accounts payable, accrued expenses, and other short-term obligations. The relevant formula would involve summarizing all those short-term obligations as shown:

Other Current Liabilities = Total Liabilities - Long-Term Liabilities

This equation will yield the needed amount.

Property, Plant, and Equipment at the End of Year 3

Assuming no sales or retirements of depreciable assets, the net book value of property, plant, and equipment at the close of Year 3 can be computed with:

Year 3 Value = Year 2 Value - Depreciation Expense (Year 2)

This ensures an accurate reflection of the company’s asset base in the balance sheet.

Retained Earnings at the End of Year 3

The retained earnings at the end of Year 3 can be derived from Year 2 retained earnings adjusted for net income earned during Year 3 and dividends paid:

Retained Earnings (End Year 3) = Retained Earnings (End Year 2) + Net Income (Year 3) - Dividends Paid (Year 3)

Clear tracking of net income and dividends is essential for this calculation.

Long-term Debt at the End of Year 3

The long-term debt can change over the years due to new borrowings or repayments. Thus, the balance at the end of Year 3 must reflect all these transactions:

Long-Term Debt (End Year 3) = Long-Term Debt (End Year 2) + New Borrowings - Repayments

This calculation will follow from the values showcased in the balance sheet.

Income Tax Rate for Year 4

The income tax rate for Year 4 will typically be based on prior years' effective tax rates or any stated changes in tax legislation affecting Watson Corporation. It can also be checked against reported tax expenses in relation to income before tax to find the effective tax rate:

Tax Rate = Income Tax Expense / Income Before Tax

Purchases of Inventories During Year 4

The purchases of inventories can be derived from the differences established in the inventory accounts:

Purchases = Ending Inventory + COGS - Beginning Inventory

This encompasses how much stock was acquired to maintain operations through Year 4.

Conclusion

In summary, by examining each required item closely, we can effectively determine Watson Corporation's financial standing over the projected years. These forecasts will be influenced by various factors, but utilizing structured formulas and the data presented in respective financial statements allows for a coherent and logical financial analysis. Always refer back to the income statement, balance sheet, and cash flow statement for the most accurate numbers, ensuring each calculation adheres to the accounting principles and standards applicable.

References

• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. John Wiley & Sons.
• Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. Wiley.
• Wild, J. J., & Subramanyam, K. R. (2019). Financial Statement Analysis. McGraw-Hill Education.
• Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill/Irwin.
• Healy, P. M., & Palepu, K. G. (2017). Business Analysis and Valuation: Using Financial Statements. Cengage Learning.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting. Wiley.
• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
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