Question

Q. 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	$	870,000	$	1,110,000
Marketable securities		0		300,000
Accounts receivable, net		2,340,000		1,440,000
Inventory		3,510,000		2,100,000
Prepaid expenses		240,000		180,000
Total current assets		6,960,000		5,130,000
Plant and equipment, net		9,340,000		8,960,000
Total assets	$	16,300,000	$	14,090,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,920,000	$	2,800,000
Note payable, 10%		3,600,000		3,000,000
Total liabilities		7,520,000		5,800,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		1,780,000		1,290,000
Total stockholders' equity		8,780,000		8,290,000
Total liabilities and stockholders' equity	$	16,300,000	$	14,090,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,770,000	$	12,680,000
Cost of goods sold		12,616,000		9,510,000
Gross margin		3,154,000		3,170,000
Selling and administrative expenses		1,594,000		1,568,000
Net operating income		1,560,000		1,602,000
Interest expense		360,000		300,000
Net income before taxes		1,200,000		1,302,000
Income taxes (30%)		360,000		390,600
Net income		840,000		911,400
Common dividends		350,000		455,700
Net income retained		490,000		455,700
Beginning retained earnings		1,290,000		834,300
Ending retained earnings	$	1,780,000	$	1,290,000

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	1.0
Average collection period	30	days
Average sale period	60	days
Return on assets	8.3	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
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 $1,580,000.) (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 $1,940,000.) (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 $14,520,000.) (Round your final answers to 2 decimal places.)

Answer 1

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Lydex Company
Statement of Earnings	This Year	Last Year
Sales	15,770,000.00	12,680,000.00
Cost of goods sold	12,616,000.00	9,510,000.00
Gross Margin	3,154,000.00	3,170,000.00
Selling and admin Expenses	1,594,000.00	1,568,000.00
Net operating Income	1,560,000.00	1,602,000.00
Interest Expense	360,000.00	300,000.00
Net Income before taxes	1,200,000.00	1,302,000.00
Income tax @ 30%	360,000.00	390,600.00
Net Income	840,000.00	911,400.00
Common Dividends	350,000.00	455,700.00
Net Income Retained	490,000.00	455,700.00
Beginning Retained Earnings	1,290,000.00	834,300.00
Ending Retained Earnings	1,780,000.00	1,290,000.00
Statement of Financial Position
Assets	This Year	Last Year
Current Assets
Cash	870,000.00	1,110,000.00
Marketable securities	-	300,000.00
Accounts Receivable (Net)	2,340,000.00	1,440,000.00
Inventory	3,510,000.00	2,100,000.00
Prepaid Expense	240,000.00	180,000.00
Total Current Assets	6,960,000.00	5,130,000.00
Property Plant & Equipment (Net)	9,340,000.00	8,960,000.00
Total Assets	16,300,000.00	14,090,000.00
Liabilities & Stockholders' Equity	This Year	Last Year
Liabilities
Current Liabilities	3,920,000.00	2,800,000.00
Notes Payable, 12%	3,600,000.00	3,000,000.00
Total Liabilities	7,520,000.00	5,800,000.00
Stockholders' Equity
Common Stock. $ 70 par value	7,000,000.00	7,000,000.00
Retained Earnings	1,780,000.00	1,290,000.00
Total Stockholders' Equity	8,780,000.00	8,290,000.00
Total Liabilities & Stockholders' Equity	16,300,000.00	14,090,000.00
	This Year	Last Year
Total Current Assets	6,960,000.00	5,130,000.00
Less:
Inventory	3,510,000.00	2,100,000.00
Prepaid Expense	240,000.00	180,000.00
Quick Assets	3,210,000.00	2,850,000.00

	This Year	Last Year	Beginning- last year
Accounts Receivable (Net)	2,340,000.00	1,440,000.00	1,580,000.00
Average Accounts Receivable	1,890,000.00	1,510,000.00
Inventory	3,510,000.00	2,100,000.00	1,940,000.00
Average Inventory	2,805,000.00	2,020,000.00
Total Assets	16,300,000.00	14,090,000.00	14,520,000.00
Average Total Assets	15,195,000.00	14,305,000.00

Ans 3 a	This Year	Last Year
Working capital
Total Current Assets less Current Liabilities	3,040,000.00	2,330,000.00
Ans 3 b
The current ratio
Total Current Assets / Current Liabilities	1.78	1.83
Ans 3 c
The Quick ratio
Quick Assets / Current Liabilities	0.82	1.02
Ans 3 d
Average collection period
Total Sales / Average Accounts Receivable	8.34	8.40
Ans 3 e
Average sale period
Total Sales / Average Inventory	5.62	6.28
Ans 3 f
The operating cycle
Average collection period + Average sale period	13.97	14.67
Ans 3 g
Total Sales / Average Assets	1.04	0.89