Question

You have just been hired as a financial analyst for Lydex Company, a 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

Problem 14-15 Part 3

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 answers 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 answers to 2 decimal place.)

f. The operating cycle. (Round your intermediate calculations and final answers 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

working capital	current assets – current liabilities
	this year ($)	last year ($)
total current assets	8010000	6210000
total current liabilities	4090000	3140000
working capital	3920000	3070000
current ratio	current assets / current liabilities
	this year ($)	last year ($)
total current assets	8010000	6210000
total current liabilities	4090000	3140000
current ratio	1.96	1.98
Acid-test ratio	(cash+marketable securities+accounts receivable) / current liabilities
	this year ($)	last year ($)
cash	1040000	1280000
marketable securities	0	300000
accounts receivable	3020000	2120000
acid assets	4060000	3700000
total current liabilities	4090000	3140000
Acid-test ratio	0.99	1.18
average collection period	(days in period * average accounts receivable) / sales
	this year ($)	last year ($)
opening accounts receivable	2120000	1750000
closing accounts receivable	3020000	2120000
average accounts receivable	2570000	1935000
days in period	365	365
sales	15940000	14380000
average collection period	58.85	49.12
average sale period	(days in period * average inventory) / cost of goods sold
	this year ($)	last year ($)
opening inventory	2300000	2110000
closing inventory	3680000	2300000
average inventory	2990000	2205000
cost of goods sold	12752000	10785000
days in period	365	365
average sale period	85.58	74.62
operating cycle	inventory period + accounts receivable period
	this year ($)	last year ($)
inventory period	85.58	74.62
accounts receivable period	58.85	49.12
operating cycle	144.43	123.74