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 $30. All of the company's sales are on account. Weller Corporation Comparative Balance Sheet (dollars in thousands) This Year Last Year $ 1,260 9,200 12,300 770 23,530 $ 1,350 7,600 10,700 500 20,150 9,200 49,212 58,412 $81,942 9,200 42, 348 51,548 $71,698 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Long-term liabilities: Bonds payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Total paid in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $20,000 $17,800 850 280 18,930 21,230 9,700 30,930 9,700 28,630 600 4,000 4,600 46,412 51,012 $81,942 600 4,000 4,600 38,468 43,068 $71,698 Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This Year Last Year Sales $74,760 $66,000 Cost of goods sold 42,550 35,000 Gross margin 32,210 31,000

Answer 1

1)
	Average Account Receivables = (beginning Account Receivables + ending Account Receivables)/2
	= ( $7600+9200)/2
	= $ 8400
	Account Receivables Turnover Ratio = Sales / average Account Receivables
	= $74760/8400
	=8.9 times
2)	Average Collection Period = 365/ Account Receivables turnover ratio
	= 365 days /8.9
	=41.01 days
3)	Average Inventory = (beginning inventory + ending inventory)/2
	= ( $10700+12300)/2
	= $ 11500
	Inventory Turnover Ratio = Cost of goods sold / average inventory
	= $42550/11500
	=3.7 times
4)	Average Sales Period = 365/ inventory turnover ratio
	= 365 days /3.7
	=98.65 days
5)	Operating Cycle = Average Collection period + average sales period
	=41.01+98.65
	139.66	days
6)	Average Assets = (beginning Assets + ending Assets)/2
	= ( $71698+81942)/2
	= $ 76820
	Assets Turnover Ratio = Sales / average Assets
	= $74760/76820
	=0.97 times
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