In: Accounting
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 | $ | 960,000 | $ | 1,260,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,700,000 | 1,800,000 | ||
Inventory | 3,900,000 | 2,400,000 | ||
Prepaid expenses | 240,000 | 180,000 | ||
Total current assets | 7,800,000 | 5,940,000 | ||
Plant and equipment, net | 9,300,000 | 8,940,000 | ||
Total assets | $ | 17,100,000 | $ | 14,880,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,900,000 | $ | 2,760,000 |
Note payable, 10% | 3,600,000 | 3,000,000 | ||
Total liabilities | 7,500,000 | 5,760,000 | ||
Stockholders' equity: | ||||
Common stock, $78 par value | 7,800,000 | 7,800,000 | ||
Retained earnings | 1,800,000 | 1,320,000 | ||
Total stockholders' equity | 9,600,000 | 9,120,000 | ||
Total liabilities and stockholders' equity | $ | 17,100,000 | $ | 14,880,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,750,000 | $ | 12,480,000 |
Cost of goods sold | 12,600,000 | 9,900,000 | ||
Gross margin | 3,150,000 | 2,580,000 | ||
Selling and administrative expenses | 1,590,000 | 1,560,000 | ||
Net operating income | 1,560,000 | 1,020,000 | ||
Interest expense | 360,000 | 300,000 | ||
Net income before taxes | 1,200,000 | 720,000 | ||
Income taxes (30%) | 360,000 | 216,000 | ||
Net income | 840,000 | 504,000 | ||
Common dividends | 360,000 | 252,000 | ||
Net income retained | 480,000 | 252,000 | ||
Beginning retained earnings | 1,320,000 | 1,068,000 | ||
Ending retained earnings | $ | 1,800,000 | $ | 1,320,000 |
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 | 30 | days |
Average sale period | 60 | days |
Return on assets | 9.5 | % |
Debt-to-equity ratio | 0.65 | |
Times interest earned ratio | 5.7 | |
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 $1,560,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)
e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)
f. The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)
g. The total asset turnover. (The total assets at the beginning of last year totaled $12,960,000.) (Round your final answers to 2 decimal places.)
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As per the question, the requirements are
PARTICULARS | THIS YEAR | PREVIOUS YEAR |
Working capital | 3900 | 3180 |
The current ratio | 2 | 2.15 |
Acid test ratio | 1 | 1.28 |
The average collection period | 63 days | 53 days |
The average sales period | 113 days | 88 days |
The operating cycle | 176 days | 141 days |
The total asset turnover | 0.92 | 0.83 |
WORKINGS
WORKING CAPITAL
EQUATION = CURRENT ASSET - CURRENT LIABILITIES
THIS YEAR- 7800-3900= 3900
PREVIOUS YEAR- 5940-2760=3180
CURRENT RATIO
EQUATION= CURRENT ASSET/ CURRENT LIABILITY
THIS YEAR- 7800/3900 = 2
PREVIOUS YEAR - 5940/2760 = 2.15
ACID TEST RATIO
EQUATION = (CURRENT ASSET- INVENTORY)/CURRENT LIABILITY
THIS YEAR- (7800-3900)/3900 = 1
PREVIOUS YEAR- (5940-2400)/2760= 1.28
AVERAGE COLLECTION PERIOD
EQUATION= AVERAGE RECIEVABLES*365/SALES
THIS YEAR- 2700*365/15750= 63 days
PREVIOUS YEAR- 1800*365/12480=53 days
AVERAGE SALE PERIOD
EQUATION = AVERAGE INVENTORY * 365/ COST OF SALES
THIS YEAR- 3900*365/ 12600= 113 days
PREVIOUS YEAR- 2400*365/ 9900=88 days
OPERATING CYCLE
EQUATION= (AVERAGE INVENTORY*365/PURCHASE)+(AVERAGE RECIEVABLES*365/RECIEVABLES
THIS YEAR = 113 days + 63days = 176 days
PREVIOUS YEAR= 88 days + 53 days= 141 days
TOTAL ASSET TURNOVER
EQUATION= NET SALES/ TOTAL ASSETS
THIS YEAR= 15750/17100= 0.92
PREVIOUS YEAR= 12480/14880= .83