Question

• Adams Corporation manufactures fasteners. The company’s income statements for three years are indicated in Exhibit 1. The balance Sheets for the same period are shown in Exhibit 2. Exhibit 1 ADAMS CORPORATION Income Statement 2015 2016 2017 Sales (all on credit)………………………… $1,500,000 $1,800,000 $2,160,000 Cost of goods sold……………………… 950,000 1,120,000 1,300,000 Gross profit………………………………… 550,000 680,000 860,000 Selling and administrative expense……… 380,000 490,000 590,000 Operating profit…………………………… 170,000 190,000 270,000 Interest expense……………………..... 30,000 40,000 85,000 Net income before taxes………………… 140,000 150,000 185,000 Taxes………………………………………… 46,120 48,720 64,850 Net Income…………………………….. $93,880 $101,280 $120,150 Shares……………………………………… 40,000 40,000 46,000 Adams Corporation has made the following projections 2018. All sales are on credit. April $24,000 July $28,000 May 16,000 August 35,000 June 18,000 September 38,000 Sales in February and March were $36,000 and $28,000, respectively. Experience has shown that of total sales, 5 percent of the sales are not collectible, 35 percent are collected in the month of sale, 50 percent are collected in the following month, and 10 percent are collected two months after sale. Total annual sales for the year 2020 are forecasted to be $2,500,000. Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labour costs will run $6,000 per month, and fixed overheads is $3,000 per month. Interest payments on the debt will be $4,500 for both March and June. A cash dividend of $20,000 is scheduled to be paid in September. Tax payments of $3,500 are due in June and September. Exhibit 2 ADAMS CORPORATION Balance Sheet Assets 2015 2016 2017 Cash……………………………………………… $20,000 $30,000 $20,000 Marketable securities………………………… 30,000 35,000 50,000 Accounts receivable……………………………… 150,000 230,000 330,000 Inventory…………………………………… 250,000 285,000 325,000 Total Current Assets……………………………… 450,000 580,000 725,000 Net Plant and equipment…………………………… 550,000 720,000 1,169,000 Total Assets……………………………………….. $1,000,000 $1,300,000 $1,894,000 Liabilities & Equity Accounts payable……………………………. $100,000 $225,000 $200,000 Notes payable (bank)……………………………… 100,000 100,000 300,000 Total Current liabilities…………………………… 200,000 325,000 500,000 Long-term liabilities…………………………… 250,000 331,120 550,740 Total liabilities……………………………………… 450,000 656,120 1,050,740 Common stock ($10 par)…………………… 400,000 400,000 460,000 Capital paid in excess of par………………. 50,000 50,000 80,000 Retained earnings………………………………… 100,000 193,880 303,260 Total stockholders’ equity…………………………….. 550,000 643,880 843,260 Total liabilities and stockholders’ equity……………… $1,000,000 $1,300,000 $1,894,000 Adams Corporation is evaluating three possible investment alternatives for 2018, and their probabilities of occurrence are given below in Exhibit 3: Exhibit 3: Adams Corporation investment choices Alternative 1 Alternative 2 Alternative 3 Outcomes Probability Outcomes Probability Outcomes Probability Failure $50 20% $90 30% $80 40% Acceptable 80 40% 160 50% 200 50% Successful 120 40% 200 20% 400 10% a. prepare indexed balance sheet for adams corporation with 2015 as the base year. (6 marks