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Balance Sheet and ratios

ABC Corporation has in recent years maintained the following relationships among the data on its financial statements:

Gross profit rate on net sales 40%
Net profit rate on net sales 10%
Rate of selling expenses to net sales 20%
Accounts Receivable turnover 8 per year
Inventory turnover 6 per year
Acid test ratio 2 to 1
Current ratio 3 to 1
Quick asset composition: 8% cash,
32% marketable securites, 60% accounts
receivable
Asset turnover 2 per year
Ratio of total assets to intangible assets 20 to 1
Ratio of accumulated depreciation to cost of
fixed assets 1 to 3
Ratio of account receivable to accounts payable 1.5 to 1
Ratio of working capital to stockholders' equity 1 to 1.6
Ratio of total deby to stockholder's equity 1 to 2

The corporation had a net income of $120,000 for 2004, which resulted in earnings of $5.20 per share of common stock. Addition information includes the following:
Capital stock authorized, issues all in 1970, and outstanding:
Common, $10 per share pare value, issued at 10% premium
Preferred, 6% nonparticipating, $100 per share par value, issued at a 10% premium
Market value per share of common at December 31, 2004: $78
Preferred dividends paid in 2004: $3,000
Times Interest Earned in 2004: 33
The amounts of the following were the same at December 31, 2004, as at
January 1, 2004: inventory, accounts receivalbe, 5% bonds payable - due
2013, and total stockholders' equity.
All purchases and sales were on account.

a. Prepare in good form the condensed balance sheet and income statment for the year ending December 31, 2004, presenting the amounts you would expect to appear on ARgo's financial statments (ignoring income taxes). Major captions appearing Argo's balance sheet are current assets, fixed assets, intangible assets, current liabilities, long term liabilities, and stockholders' equity. In addition to the accounts divulged in the problem, you should include accounts for prepaid expenses, accrued expenses, and administrative expenses. Supporting computations should be in good form.
b. Compute the following for 2004. (Show your computations):
1. Rate of return on stockholders' equity
2. Price/earnings ration for common stock
3. Dividends paid per share of common stock
4. Dividends paid per share of preferred stock
5. Yield on common stock

Solution Preview

Please see the attached file

We first start with the Income Statement
The net profit margin = Net Income/Net Sales = 10%
Net Income = 120,000
Net Sales = 120,000/10% = 1,200,000
Gross Profit = 40%
Cost of Goods Sold = 1,200,000X60%=720,000
Selling Expense = 1,200,000X20%=240,000
EBIT - Interest = 120,000
EBIT/Interest = 33
Interest Amount = 120,000/32 = 3,750
EBIT = 123,750
Gross Profit 480,000
EBIT = Gross Profit - Selling Expense - Administrative Expense
123,750 =480,000-240,000-Administrative Expense
Administrative Expense= 116,250
The income statement is
Net Sales 1,200,000
Cost of Goods Sold 720,000
Gross Profit 480,000
Selling Expense 240,000
Administrative Expense 116,250
EBIT 123,750
Interest 3,750
Net Income 120,000

Asset turnover = Sales/Assets = 2
Assets = Sales/2 = 1,200,000/2 = 600,000
Accounts Receivable Turnover = Sales/Accounts Receivable = 8
Accounts Receivable = Sales/8 = 1,200,000/8 = 150,000
Inventory Turnover = Cost of Goods Sold/Inventory = 6
Inventory = 720,000/6 = ...

Solution Summary

The solution explains how to prepare a balance sheet and use it to calculate the given ratios.

$2.19