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Exercise 14-5 Financial Ratios for Assessing Profitability [LO14-5] Comparative financial statements for Weller Corporation, a merchandising...

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 800,000 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 this year was $18. 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 $ 1,280 $ 1,560
Accounts receivable, net 12,300 9,100
Inventory 9,700 8,200
Prepaid expenses 1,800 2,100
Total current assets 25,080 20,960
Property and equipment:
Land 6,000 6,000
Buildings and equipment, net 19,200 19,000
Total property and equipment 25,200 25,000
Total assets $ 50,280 $ 45,960
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,500 $ 8,300
Accrued liabilities 600 700
Notes payable, short term 300 300
Total current liabilities 10,400 9,300
Long-term liabilities:
Bonds payable 5,000 5,000
Total liabilities 15,400 14,300
Stockholders' equity:
Common stock 800 800
Additional paid-in capital 4,200 4,200
Total paid-in capital 5,000 5,000
Retained earnings 29,880 26,660
Total stockholders' equity 34,880 31,660
Total liabilities and stockholders' equity $ 50,280 $ 45,960
Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
This Year Last Year
Sales $ 79,000 $ 74,000
Cost of goods sold 52,000 48,000
Gross margin 27,000 26,000
Selling and administrative expenses:
Selling expenses 8,500 8,000
Administrative expenses 12,000 11,000
Total selling and administrative expenses 20,500 19,000
Net operating income 6,500 7,000
Interest expense 600 600
Net income before taxes 5,900 6,400
Income taxes 2,360 2,560
Net income 3,540 3,840
Dividends to common stockholders 320 600
Net income added to retained earnings 3,220 3,240
Beginning retained earnings 26,660 23,420
Ending retained earnings $ 29,880 $ 26,660

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).)

Solutions

Expert Solution

Ans. 1 Gross margin percentage   = Gross margin / Net sales * 100
$27,000 / $79,000 * 100
34.2%
Ans. 2 Net profit margin percentage = Net income / Net sales * 100
$3,540 / $79,000 * 100
4.5%
Ans. 3 Return on assets =   Net income / Average assets * 100
$3,540 / $48,120 * 100
7.4%
*Average assets = (Beginning assets + Ending assets) / 2
($45,960 + $50,280) / 2
$48,120
Ans. 4 Return on Common stockholder's equity =   Net income / Average Common stockholder's equity * 100
$3,540 / $33,270 * 100
10.64%
* Average Stockholder's equity =   (Beginning equity + Ending equity) / 2
($31,660 + $34,880) / 2
$33,270
Answers of the commented questions:
Ans. 1 Working capital =     Total current assets - Total current liabilities
$25,080 - $10,400
$14,680
Ans. 2 Current ratio   =   Total current assets / Total current liabilities
$25,080 / $10,400
2.41 : 1
Ans. 3 Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
($25,080 - $9,700 - $1,800) / $10,400
$13,580 / $10,400
1.31 : 1

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