Question

manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	1,040,000	$	1,280,000
Marketable securities		0		300,000
Accounts receivable, net		3,020,000		2,120,000
Inventory		3,680,000		2,300,000
Prepaid expenses		270,000		210,000
Total current assets		8,010,000		6,210,000
Plant and equipment, net		9,680,000		9,130,000
Total assets	$	17,690,000	$	15,340,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,090,000	$	3,140,000
Note payable, 10%		3,720,000		3,120,000
Total liabilities		7,810,000		6,260,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,380,000		1,580,000
Total stockholders' equity		9,880,000		9,080,000
Total liabilities and stockholders' equity	$	17,690,000	$	15,340,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,940,000	$	14,380,000
Cost of goods sold		12,752,000		10,785,000
Gross margin		3,188,000		3,595,000
Selling and administrative expenses		1,216,000		1,636,000
Net operating income		1,972,000		1,959,000
Interest expense		372,000		312,000
Net income before taxes		1,600,000		1,647,000
Income taxes (30%)		480,000		494,100
Net income		1,120,000		1,152,900
Common dividends		320,000		576,450
Net income retained		800,000		576,450
Beginning retained earnings		1,580,000		1,003,550
Ending retained earnings	$	2,380,000	$	1,580,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	32	days
Average sale period	60	days
Return on assets	8.6	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
Price-earnings ratio	10

3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute:

a. Working capital.

b. The current ratio. (Round your final answers to 2 decimal places.)

c. The acid-test ratio. (Round your final answers to 2 decimal places.)

d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,750,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

e. The average sale period. (The inventory at the beginning of last year totaled $2,110,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

f. The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.)

g. The total asset turnover. (The total assets at the beginning of last year totaled $14,690,000.) (Round your final answers to 2 decimal places.)

Answer 1

		This year	Last year
a	Current assets	8010000	6210000
	Current liabilities	4090000	3140000
	Working capital = Current assets - current liabilities
	Working capital	3920000	3070000
b	Current ratio = Current assets / current liabilities
	Current ratio	1.96	1.98
c	Acid test ratio = Liquid assets / current liabilities
	Liquid assets = current assets - prepaid expense - merchandise inventory
	Liquid assets	4060000	3700000
	Current liabilities	4090000	3140000
	Acid test ratio	0.99	1.18
	Accounts receivable turnover = net credit sales /Average accounts receivable
	Net sales	15940000	14380000
	Beginning accounts receivable	2120000	1750000
	Ending accounts receivable	3020000	2120000
	Average accounts receivable	2570000	1935000
	Accounts receivable turnover	6.2	7.4
d	Average collection period = 365 / accounts receivable tunover
	Average collection period	58.85	49.12	Days
	Inventory turnover = Cost of goods sold / Average inventory
	Cost of goods sold	12752000	10785000
	Beginning inventory	2300000	2110000
	Ending inventory	3680000	2300000
	Average inventory	2990000	2205000
	Average inventory = (Beginning + Ending )/2
	Inventory turnover	4.3	4.9
e	Average sales period = 365 / inventory turnover
	Average sales period	85.58	74.62	Days
f	Operating cycle = days sales in inventory + average collection period
	Operating cycle	144.43	123.74	Days
g	Assets turnover ratio = Net sales / average total assets
	Net sales	15940000	14380000
	Beginning total assets	15340000	14690000
	Ending total assets	17690000	15340000
	Average total assets	16515000	15015000
	Assets turnover ratio	0.97	0.96