Question

Exercise 14-3 Financial Ratios for Asset Management [LO14-3] 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 600,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, 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 $21. 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 $ 1,200 $ 1,300 Accounts receivable, net 10,000 7,300 Inventory 13,800 12,100 Prepaid expenses 610 660 Total current assets 25,610 21,360 Property and equipment: Land 9,700 9,700 Buildings and equipment, net 44,063 36,328 Total property and equipment 53,763 46,028 Total assets $ 79,373 $ 67,388 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 20,300 $ 17,600 Accrued liabilities 990 900 Notes payable, short term 110 110 Total current liabilities 21,400 18,610 Long-term liabilities: Bonds payable 9,200 9,200 Total liabilities 30,600 27,810 Stockholders' equity: Common stock 600 600 Additional paid-in capital 4,000 4,000 Total paid-in capital 4,600 4,600 Retained earnings 44,173 34,978 Total stockholders' equity 48,773 39,578 Total liabilities and stockholders' equity $ 79,373 $ 67,388 Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This Year Last Year Sales $ 74,390 $ 64,000 Cost of goods sold 40,145 39,000 Gross margin 34,245 25,000 Selling and administrative expenses: Selling expenses 10,900 10,200 Administrative expenses 6,700 6,900 Total selling and administrative expenses 17,600 17,100 Net operating income 16,645 7,900 Interest expense 920 920 Net income before taxes 15,725 6,980 Income taxes 6,290 2,792 Net income 9,435 4,188 Dividends to common stockholders 240 450 Net income added to retained earnings 9,195 3,738 Beginning retained earnings 34,978 31,240 Ending retained earnings $ 44,173 $ 34,978 Required: Compute the following financial data for this year: 1. Accounts receivable turnover. (Assume that all sales are on account.) (Round your answer to 2 decimal places.) 2. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.) 3. Inventory turnover. (Round your answer to 2 decimal places.) 4. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.) 5. Operating cycle. (Round your intermediate calculations and final answer to 2 decimal places.) 6. Total asset turnover. (Round your answer to 2 decimal places.)

Answer 1

1)                                  
Average Account Receivables = (beginning Account Receivables + ending Account Receivables)/2
= ( $7300+10000)/2                          
= $ 8650                              
Account Receivables Turnover Ratio = Sales / average Account Receivables  
= $74390/8650                          
=8.6 times                          
2)   Average Collection Period = 365/ Account Receivables turnover ratio      
= 365 days /8.6   
=42.44 days                              
3)   Average Inventory = (beginning inventory + ending inventory)/2      
= ( $12100+13800)/2                          
= $ 12950                              
Inventory Turnover Ratio = Cost of goods sold / average inventory      
= $40145/12950   
=3.1 times                          
4)   Average Sales Period = 365/ inventory turnover ratio          
= 365 days /3.1   
=117.74 days                              
5)   Operating Cycle = Average Collection period + average sales period      
=42.44+117.74   
160.18 days                          
6)   Average Assets = (beginning Assets + ending Assets)/2          
= ( $67388+79373)/2                          
= $ 73380.50   
Assets Turnover Ratio = Sales / average Assets              
= $74390/73380.50   
=1.01 times                          

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