Exercise 13-2 Financial Ratios for Assessing Liquidity [LO13-2] Comparative fina

Question

Exercise 13-2 Financial Ratios for Assessing Liquidity [LO13-2]

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 500,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $1.25 last year and $0.90 this year. The market value of the company’s common stock at the end of the year was $22. All of the company’s sales are on account.

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 500,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $1.25 last year and $0.90 this year. The market value of the company’s common stock at the end of the year was $22. All of the company’s sales are on account.

Explanation / Answer

1) Working capital = Current assets -Current liabilities

= 25910-20150

Working capital = $5760

2) Current ratio = Current assets/Current liabilities

= 25910/20150

Current ratio = 1.29:1

3) Acid test ratio = (Cash+account receivable)/Current liabilities

= (1270+10500)/20150

Acid test ratio = 0.58:1

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