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 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).)

Answer 1

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