Argo Sales Corporation has in recent years maintained the following relationships among the data on its financial statements:
Gross profit margin 40%
Net profit margin 10%
Rate of selling expenses to net sales 20%
Accounts receivable turnover 8 times per year
Inventory turnover 6 times per year
Quick-asset composition: 8% cash, 32% marketable securities, 60% accounts receivable
Acid-test ratio (Quick ratio) 2-to-1
Current ratio: 3-to-1
Asset turnover: 2 per year
Ratio of total assets to intangible assets 20-to-1
Ratio of accumulated depreciation to gross property, plant and equipment : 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
Debt/Equity ratio: 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. No common or preferred shares were sold or bought back during 2004. The corporation does not have minority share of earnings, equity income or non-recurring items. Additional information includes the following:
Capital stock authorized, issued (all in 1970), and outstanding:
Common, $10 per share per share, 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 receivable, 5% bonds payable – due 2013, total assets and total stockholders’ equity.
Assuming there is no income tax expense and specific depreciation expense, but still need the accumulated depreciation for balance sheet.
Administration expense, accrued expense payable and prepaid expenses are all backed in numbers.
All purchases and sales were on account. Assume the company uses direct write-off method to account for uncollectible accounts.
Required: Prepare in good form the balance sheet and income statement for the year ending December 31, 2004. Please show all calculations.
To prepare the balance sheet and income statement for Argo Sales Corporation for the year ending December 31, 2004, we will need to use the given financial data and equations.
Let's start with the income statement:
1. Net Sales:
Given: Gross profit margin = 40%
Net profit margin = 10%
Rate of selling expenses to net sales = 20%
Net Sales = Gross Profit / (1 - Selling Expense)
Since Gross Profit = Net Sales * Gross Profit Margin,
Net Sales = Net Profit / (1 - (Selling Expense / Net Sales))
Net Profit = Net Income = $120,000
Selling Expense = Rate of selling expenses to net sales * Net Sales
Plug in the values to calculate Net Sales:
Net Sales = $120,000 / (1 - (0.2 / Net Sales))
Solving this equation will give us the value of Net Sales.
2. Cost of Goods Sold:
Given: Gross profit margin = 40%
Gross Profit = Net Sales * Gross Profit Margin
Cost of Goods Sold = Net Sales - Gross Profit
3. Gross Profit:
Given: Gross profit margin = 40%
Gross Profit = Net Sales * Gross Profit Margin
4. Operating Expenses:
Given: Selling Expense = Rate of selling expenses to net sales * Net Sales
Operating Expenses = Selling Expense + Administration Expense
To calculate the above values, you will need to use the given financial data.
Now let's move on to the balance sheet:
1. Current Assets:
a) Cash: We know the quick-asset composition and Quick ratio.
Cash = Quick ratio * Quick Assets
b) Marketable Securities: We know the quick-asset composition and Quick ratio.
Marketable Securities = Quick ratio * Quick Assets
c) Accounts Receivable: We know the turnover and Net Sales.
Accounts Receivable = Net Sales / Accounts Receivable Turnover
d) Prepaid Expenses: Given data.
e) Inventory: We know the inventory turnover and Cost of Goods Sold.
Inventory = Cost of Goods Sold / Inventory Turnover
2. Long-Term Assets: Given data.
3. Total Assets: Total Assets = Current Assets + Long-Term Assets
4. Current Liabilities: Given data.
5. Long-Term Liabilities: Given data.
6. Stockholders' Equity: We know the debt/equity ratio and total liabilities.
Stockholders' Equity = Total Liabilities / Debt/Equity Ratio
7. Total Liabilities and Stockholders' Equity: Total Liabilities and Stockholders' Equity = Total Liabilities + Stockholders' Equity
Using the above calculations, you can prepare the balance sheet and income statement for Argo Sales Corporation for the year ending December 31, 2004.