Argo Sales Corporation has in recent prior 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 securities, 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 accounts receivable to accounts |
|
|
Payable |
1.5 to 1 |
|
Ratio of working capital to stockholders’ equity |
1 to 1.6 |
|
Ratio of total debt to stockholders’ equity |
1 to 2 |
The corporation had a net income of $120,000 for 2001, which resulted in earnings of $5.20 per share of common stock. Additional information includes the following:
Capital stock authorized, issued (all in 1970), and outstanding:
Common, $10 per share par 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, 2001: $78.
Preferred dividends paid in 2001: $3,000. Times interest earned in 2001: 33.
The amounts of the following were the same at December 31, 2001, as at January 1, 2001: inventory, accounts receivable, 5% bonds payable—due 2010, and total stockholders’ equity.
All purchases and sales were on account.
Required a. Prepare in good form the condensed balance sheet and income statement for the year ending December 31, 2001, presenting the amounts you would expect to appear on Argo’s financial statements (ignoring income taxes). Major captions appearing on 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 2001. (Show your computations.):
1. Rate of return on stockholders’ equity
2. Price/earnings ratio for common stock
3. Dividends paid per share of common stock
4. Dividends paid per share of preferred stock
5. Yield on common stock