Question

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 this 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	$	1,140		$	1,390
Accounts receivable, net		10,000			7,400
Inventory		13,700			12,500
Prepaid expenses		770			520
Total current assets		25,610			21,810
Property and equipment:
Land		10,200			10,200
Buildings and equipment, net		40,288			35,208
Total property and equipment		50,488			45,408
Total assets	$	76,098		$	67,218
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,900		$	18,700
Accrued liabilities		960			890
Notes payable, short term		120			120
Total current liabilities		19,980			19,710
Long-term liabilities:
Bonds payable		8,200			8,200
Total liabilities		28,180			27,910
Stockholders' equity:
Common stock		600			600
Additional paid-in capital		4,000			4,000
Total paid-in capital		4,600			4,600
Retained earnings		43,318			34,708
Total stockholders' equity		47,918			39,308
Total liabilities and stockholders' equity	$	76,098		$	67,218

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	75,690		$	64,000
Cost of goods sold		41,920			40,000
Gross margin		33,770			24,000
Selling and administrative expenses:
Selling expenses		11,000			10,600
Administrative expenses		7,200			6,300
Total selling and administrative expenses		18,200			16,900
Net operating income		15,570			7,100
Interest expense		820			820
Net income before taxes		14,750			6,280
Income taxes		5,900			2,512
Net income		8,850			3,768
Dividends to common stockholders		240			600
Net income added to retained earnings		8,610			3,168
Beginning retained earnings		34,708			31,540
Ending retained earnings	$	43,318		$	34,708

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.)

.

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 this year was $29. 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	$	1,120		$	1,290
Accounts receivable, net		10,200			6,700
Inventory		12,700			10,700
Prepaid expenses		680			550
Total current assets		24,700			19,240
Property and equipment:
Land		9,700			9,700
Buildings and equipment, net		42,200			38,360
Total property and equipment		51,900			48,060
Total assets	$	76,600		$	67,300
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,600		$	18,200
Accrued liabilities		1,060			850
Notes payable, short term		0			100
Total current liabilities		19,660			19,150
Long-term liabilities:
Bonds payable		8,500			8,500
Total liabilities		28,160			27,650
Stockholders' equity:
Common stock		2,000			2,000
Additional paid-in capital		4,000			4,000
Total paid-in capital		6,000			6,000
Retained earnings		42,440			33,650
Total stockholders' equity		48,440			39,650
Total liabilities and stockholders' equity	$	76,600		$	67,300

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	73,000		$	65,000
Cost of goods sold		39,000			42,000
Gross margin		34,000			23,000
Selling and administrative expenses:
Selling expenses		11,000			10,800
Administrative expenses		7,100			6,000
Total selling and administrative expenses		18,100			16,800
Net operating income		15,900			6,200
Interest expense		850			850
Net income before taxes		15,050			5,350
Income taxes		6,020			2,140
Net income		9,030			3,210
Dividends to common stockholders		240			600
Net income added to retained earnings		8,790			2,610
Beginning retained earnings		33,650			31,040
Ending retained earnings	$	42,440		$	33,650

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

(For all requirements, round your answers to 2 decimal places.)

.

Answer 1

Part I

Question 1

AR turnover is computed as Net Credit Sales/Average Accounts Receivable

Average Accounts Receivable = (Opening AR + Closing AR)/2 = (10000 + 7400)/2 = 8700

Hence, AR Turnover is 73000/8700 = 8.39

Question 2

Average Collection Period is computed as 365/AR Turnover Ratio.

Hence it is 365/8.39 = 43.5 days

Question 3

Inventory turnover is computed as cost of goods sold/Average Inventory

Average Inventory = (Opening Inventory + Closing Inventory)/2 = (13700 + 12500)/2 = 13,100

Inventory Turnover Ratio = 41920/13100 = 3.2

Question 4

Average Sale period is 365/Inventory Turnover Ratio = 365/3.2 =114.06 days

Question 5

Operating Cycle is computed as:

Average Collection Period + Average Sales Period + Average Payment Period

Average Payment Period is computed as

365/(Purchases/Average Payables)

Purchases = Cost of Goods Sold - Opening Stock + Closing Stock = 41920 -12500 + 13700 = 43,120

Average Payables = (Opening Payables + Closing Payables)/2 = (18700 + 18900)/2 = 18800

Average Payment period = 365/(43120/18800) = 159.14

Hence the Operating Cycle is 43.5 + 114.06 + 159.14 = 316.70 days

Question 6

Total asset turnover ratio is computed as Net Sales/Average Total Assets

Average Total Assets = (Opening Total Assets + Closing Total Assets)/2 = (67218 +76098)/2 = 71,658

Total Asset Turnover Ratio = 75690/71658 = 1.06

Part II

Question 1

Times interest earned ratio is computed as:

EBIT/Interest Expenses

EBIT is the same as 'Net Operating Income Above'

Hence Times Interest Earned Ratio = 15,900/850 = 18.71

Question 2

Debt-to Equity is computed as Total Liabilities/Total Stockholders Equity = 28,160/48,440 = 0.58

Question 3

Equity Multiplier is computed as Total Assets/Total Stockholders Equity = 76,600/48,440 = 1.58