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 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 12,300 9,700 1,800 25,080 $ 1,560 9,100 8,200 2,100 20,960 6,000 19,200 25, 200 $50,280 6,000 19,000 25,000 $45,960 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 $ 9,500 600 300 10,400 $ 8,300 700 300 9,300 5,000 15,400 5,000 14,300 800 4.200 800 4 20

Answer 1

Solution: 1. Computation of accounts receivable turnover: Accounts receivable turnover Credit sales / Average accounts receivables Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable)/2 Average accounts receivable ($ 9,100+$ 12,300) / 2 Average accounts receivable $ 10,700 Credit Sales = $ 79,000 Accounts receivable turnover $ 79,000 / $ 10,700 = 7.38 Accounts receivable turnover = 7.38 2. Computation of Average collection period: Average collection period = 365 / Accounts receivable turnover Average collection period = 365 / 7.38 Average collection period = 49.45 days

3. Computation of inventory turnover Inventory turnover = Cost of goods sold / Average inventory Average inventory (Beginning Inventory + Ending inventory)/2 = ($ 8,200 +$ 9,700)/2 Average inventory Average inventory = $ 8,950 Cost of goods sold = $ 52,000 Inventory turnover = $ 52,000 / $ 8950 Inventory turnover = 5.81 times

4. Computation of average sale period Average sale period = 365 / Inventory turnover Inventory turnover = 5.81 times Average sale period = 365 / 5.81 Average sale period = 62.82 days 5. Computation of operating cycle: Operating cycle = Average collection period + Average sale period Average collection period - 49.45 days Average sale period = 62.82 days Operating cycle = 49.45 days +62.82 days Operating cycle = 112.27 days

6. Computation of total asset turnover Total assets turnover = Sales / Average total assets Average total assets = (Beginning assets + Ending assets)/2 = $ 45,960 +$ 50,280)/2 Average total assets Average total assets = $ 48,120 Sales = $ 79,000 Total assets turnover = $ 79,000 / $ 48,120 Total assets turnover = 1.64

Conclusion

Particulars
1. Accounts receivable turnover	7.38
2. Average collection period	49.45 days
3. Inventory turnover	5.81
4. Average sale period	62.82 days
5. Operating cycle	112.27 days
6. Total asset turnover	1.64