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 860,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 12%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the 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 $ 976 $ 1,920
Accounts receivable, net 15,000 10,050
Inventory 10,000 8,440
Prepaid expenses 1,860 2,220
Total current assets 27,836 22,630
Property and equipment:
Land 6,600 6,600
Buildings and equipment, net 19,800 19,600
Total property and equipment 26,400 26,200
Total assets $ 54,236 $ 48,830
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,100 $ 8,600
Accrued liabilities 720 1,000
Notes payable, short term 360 360
Total current liabilities 11,180 9,960
Long-term liabilities:
Bonds payable 6,250 6,250
Total liabilities 17,430 16,210
Stockholders' equity:
Common stock 860 860
Additional paid-in capital 4,500 4,500
Total paid-in capital 5,360 5,360
Retained earnings 31,446 27,260
Total stockholders' equity 36,806 32,620
Total liabilities and stockholders' equity $ 54,236 $ 48,830
Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)
This Year Last Year
Sales $ 85,000 $ 80,000
Cost of goods sold 55,000 51,000
Gross margin 30,000 29,000
Selling and administrative expenses:
Selling expenses 9,100 8,600
Administrative expenses 12,600 11,600
Total selling and administrative expenses 21,700 20,200
Net operating income 8,300 8,800
Interest expense 750 750
Net income before taxes 7,550 8,050
Income taxes 3,020 3,220
Net income 4,530 4,830
Dividends to common stockholders 344 645
Net income added to retained earnings 4,186 4,185
Beginning retained earnings 27,260 23,075
Ending retained earnings $ 31,446 $ 27,260
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

A.

This year $30,000/$85,000 = 35.3%

Last Year $29,000/$80,000 = 36.3%

B.

This year $4,186/$85,000 = 4.9%

Last Year $4,185/$80,000 = 5.2%

C.

This year $4,186/$54,236 = 7.7%

Last Year $4,185/$48,830 = 8.6%

D.

This year $4,186/$36,806 = 11.4%

Last Year $4,185/$32,620 = 12.8%

Step-by-step explanation:

A. Gross Margin % measures the profitability of a Business based on its direct input costs (that is having not considered its indirect costs which includes the selling , general and administrative costs)

It is derived as Gross Margin divided by Net sales x 100%

B. Net profit % = is a measure of profitability of a business in relation to its sales. All relevant costs (except dividend payable to common stock holders) would have been considered in arriving at the applied profit

It is derived as Net Income divided by Net sales x 100%

C. return on total Assets. This is a measure of a business profitability in relation to its investments in Assets. The higher the rate the better a firm is said to be in its conversion process

It is derived as Net income divided by Total Assets x 100%

D. Return on Equity is a measure of profitability in relation to common stock holders investment in shares in a business. The higher the rate, the better the adjudged performance of the business by the shareholders.

It is derived as Net income divided by total shareholders equity x 100%