Exercise 15-2 Financial Ratios for Assessing Liquidity [LO15-2] Comparative fina

Question

Exercise 15-2 Financial Ratios for Assessing Liquidity [LO15-2]

Comparative financial statements for Weller Corporation, a merchandising company, for the fiscal 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. The market value of the company’s common stock at the end of the year was $20. All of the company’s sales are on account.

Compute the following financial data and ratios for this year:

Comparative financial statements for Weller Corporation, a merchandising company, for the fiscal 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. The market value of the company’s common stock at the end of the year was $20. All of the company’s sales are on account.

Explanation / Answer

1. Working capital = Current assets - Current liabilities

= 26070 - 20270 = 5800

2. Current ratio = Current assets / Current liabilities

= 26070 / 20270 = 1.3 : 1

3. Acid test ratio = Current assets - inventory / current liabilities

= 26070 - 13500 / 20270 = 12570 / 20270 = 0.62.

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