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 the year was $23. 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 $ 1,230 $ 1,390 Accounts receivable, net 9,100 7,000 Inventory 14,000 12,100 Prepaid expenses 700 540 Total current assets 25,030 21,030 Property and equipment: Land 9,200 9,200 Buildings and equipment, net 41,220 35,970 Total property and equipment 50,420 45,170 Total assets $ 75,450 $ 66,200 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 20,400 $ 17,800 Accrued liabilities 960 850 Notes payable, short term 210 210 Total current liabilities 21,570 18,860 Long-term liabilities: Bonds payable 8,000 8,000 Total liabilities 29,570 26,860 Stockholders' equity: Common stock 600 600 Additional paid-in capital 4,000 4,000 Total paid-in capital 4,600 4,600 Retained earnings 41,280 34,740 Total stockholders' equity 45,880 39,340 Total liabilities and stockholders' equity $ 75,450 $ 66,200 Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This Year Last Year Sales $ 72,000 $ 64,000 Cost of goods sold 41,000 39,000 Gross margin 31,000 25,000 Selling and administrative expenses: Selling expenses 10,900 10,800 Administrative expenses 7,400 6,900 Total selling and administrative expenses 18,300 17,700 Net operating income 12,700 7,300 Interest expense 800 800 Net income before taxes 11,900 6,500 Income taxes 4,760 2,600 Net income 7,140 3,900 Dividends to common stockholders 600 600 Net income added to retained earnings 6,540 3,300 Beginning retained earnings 34,740 31,440 Ending retained earnings $ 41,280 $ 34,740 Required: Compute the following financial data and ratios for this year: 1. Working capital. (Enter your answer in thousands.) 2. Current ratio. (Round your answer to 2 decimal places.) 3. Acid-test ratio. (Round your answer to 2 decimal places.)

Answer 1

Ans. 1	Working capital =     Total current assets - Total current liabilities
		$25,030 - $21,570
		$3,460
Ans. 2	Current ratio   =   Total current assets / Total current liabilities
		$25,030 / $21,570
		1.16 : 1
Ans. 3	Acid test ratio   = (Cash + Accounts receivable) / Total current liabilities
		($1,230 + $9,100) / $21,570
		$10,330 / $21,570
		0.48 : 1
	*Inventory and prepaid expenses are not the liquid assets so these are not included
	in the calculation of acid test ratio.