In: Accounting
Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6]
[The following information applies to the questions displayed below.]
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 |
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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 |
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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 | |
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 $1,580,000.) (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 $1,940,000.) (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 $14,520,000.) (Round your final answers to 2 decimal places.)
Ans. 3 | ||||
Ans. A | Working capital = Total current assets - Total current liabilities | |||
This year | $6,960,000 - $3,920,000 | $3,040,000 | ||
Last year | $5,130,000 - $2,800,000 | $2,330,000 | ||
Ans. B | Current ratio = Total current assets / Total current liabilities | |||
This year | $6,960,000 / $3,920,000 | 1.78 : 1 | ||
Last year | $5,130,000 / $2,800,000 | 1.83 : 1 | ||
Ans. C | Quick ratio = (Total current assets - Inventory - Prepaid expenses) / Total current liabilities | |||
This year | ($6,960,000 - $3,510,000 - $240,000) / $3,920,000 | 0.82 : 1 | ||
Last year | ($5,130,000 - $2,100,000 - $180,000) / $2,800,000 | 1.02 : 1 | ||
Ans. D | Average collection period = No. of days in year / Net credit sales * Average accounts receivables | |||
This year | 365 / $15,770,000 * $1,890,000 | 43.74 | days | |
Last year | 365 / $12,680,000 * $1,510,000 | 43.47 | days | |
*Average receivable = (Beginning receivables + Ending receivables) / 2 | ||||
This year | ($1,440,000 + $2,340,000) / 2 | $1,890,000 | ||
Last year | ($1,580,000 + $1,440,000) / 2 | $1,510,000 | ||
Ans. E | Average sales period = No. of days in year / Cost of goods sold * Average inventory | |||
This year | 365 / $12,616,000 * $2,805,000 | 81.15 | days | |
Last year | 365 / $9,510,000 * $2,020,000 | 77.53 | days | |
*Average inventory = (Beginning inventory + Ending inventory) / 2 | ||||
This year | ($2,100,000 + $3,510,000) / 2 | $2,805,000 | ||
Last year | ($1,940,000 + $2,100,000) / 2 | $2,020,000 | ||
Ans. F | Operating cycle = Average collection period + Average sales period | |||
This year | 43.74 + 81.15 | 124.89 | days | |
Last year | 43.47 + 77.53 | 121.00 | days | |
Ans. G | Total assets turnover = Sales / Average operating assets | |||
This year | $15,770,000 / $15,195,000 | 1.04 | times | |
Last year | $12,680,000 / $14,305,000 | 0.89 | times | |
*Average assets = (Beginning assets + Ending assets) / 2 | ||||
This year | ($14,090,000 + $16,300,000) / 2 | $15,195,000 | ||
Last year | ($14,520,000 + $14,090,000) / 2 | $14,305,000 | ||