Question

Exercise 14-5 Financial Ratios for Assessing Profitability [LO14-5] Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 820,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of the year was $19. All of the company’s sales are on account. Weller Corporation Comparative Balance Sheet (dollars in thousands) This Year Last Year Assets Current assets: Cash $ 3,812 $ 3,980 Accounts receivable, net 12,500 9,200 Inventory 9,800 8,280 Prepaid expenses 1,820 2,140 Total current assets 27,932 23,600 Property and equipment: Land 6,200 6,200 Buildings and equipment, net 19,400 19,200 Total property and equipment 25,600 25,400 Total assets $ 53,532 $ 49,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 9,700 $ 8,400 Accrued liabilities 640 800 Notes payable, short term 320 320 Total current liabilities 10,660 9,520 Long-term liabilities: Bonds payable 7,500 7,500 Total liabilities 18,160 17,020 Stockholders' equity: Common stock 820 820 Additional paid-in capital 4,300 4,300 Total paid-in capital 5,120 5,120 Retained earnings 30,252 26,860 Total stockholders' equity 35,372 31,980 Total liabilities and stockholders' equity $ 53,532 $ 49,000 Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This Year Last Year Sales $ 81,000 $ 76,000 Cost of goods sold 53,000 49,000 Gross margin 28,000 27,000 Selling and administrative expenses: Selling expenses 8,700 8,200 Administrative expenses 12,200 11,200 Total selling and administrative expenses 20,900 19,400 Net operating income 7,100 7,600 Interest expense 900 900 Net income before taxes 6,200 6,700 Income taxes 2,480 2,680 Net income 3,720 4,020 Dividends to common stockholders 328 656 Net income added to retained earnings 3,392 3,364 Beginning retained earnings 26,860 23,496 Ending retained earnings $ 30,252 $ 26,860 Required: Compute the following financial data for this year: 1. Gross margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) 2. Net profit margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) 3. Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) 4. Return on equity. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Answer 1

Hi,

I have solved this question by calculating gross margin ratio, net profit margin ratio, return on total assets and return on equity. As opening total assets in return on total assets not given, we assumed it to be zero.

Any doubts in the solution are welcome.