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	$	890,000	$	1,130,000
Marketable securities		0		300,000
Accounts receivable, net		2,420,000		1,520,000
Inventory		3,530,000		2,300,000
Prepaid expenses		240,000		180,000
Total current assets		7,080,000		5,430,000
Plant and equipment, net		9,380,000		8,980,000
Total assets	$	16,460,000	$	14,410,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,940,000	$	2,840,000
Note payable, 10%		3,620,000		3,020,000
Total liabilities		7,560,000		5,860,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		1,900,000		1,550,000
Total stockholders' equity		8,900,000		8,550,000
Total liabilities and stockholders' equity	$	16,460,000	$	14,410,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,790,000	$	12,880,000
Cost of goods sold		12,632,000		9,660,000
Gross margin		3,158,000		3,220,000
Selling and administrative expenses		1,796,000		1,576,000
Net operating income		1,362,000		1,644,000
Interest expense		362,000		302,000
Net income before taxes		1,000,000		1,342,000
Income taxes (30%)		300,000		402,600
Net income		700,000		939,400
Common dividends		350,000		469,700
Net income retained		350,000		469,700
Beginning retained earnings		1,550,000		1,080,300
Ending retained earnings	$	1,900,000	$	1,550,000

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	40	days
Average sale period	60	days
Return on assets	8.5	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
Price-earnings ratio	10

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 $1,600,000.) (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 $1,960,000.) (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 $13,000,000.) (Round your final answers to 2 decimal places.)

	This Year Last Year a. Working capital b. The current ratio c. The acid-test ratio d. The average collection period days days e. The average sale period days days f. The operating cycle days days g. The total asset turnover

Answer 1

This year

A. Working Capital = Current assets - Current Liabilities

=7080000-3940000 = 3140000

B. Current Ratio= Current Assets / Current Liabilities

=7080000/3940000= 1.79 times

C. Acid test ratio= (Cash+ Marketable securities+ Accounts Receivable) / Current Liabilities

= 3310000/ 3940000= .84 times

D. Accounts Receivable turnover ratio= Net credit sales/ Average Accounts Receivable

Average Accounts Receivable= (1,520,000+2,420,000)/2 =1970000

Accounts Receivable turnover ratio = 15,790,000/ 1970000=8.02 times

Average Collection Period = 365 days/ Accounts Receivable turnover ratio

=365/8.02= 45.51 days

E. Average sales period = (Average Inventory x 365) / Cost of sales

Average inventory = (2,300,000+ 3,530,000) / 2 = 2915000

Average sales period = (2915000 x 365) / 12,632,000 = 84.23 days

F. Operating cycle = Average collection period + Average sales period

= 45.51+84.23 = 129.74 days

G. Total Asset Turnover Ratio= Net sales/ Average Total Assets

Average total assets = ( 14,410,000+ 16,460,000) / 2= 15435000

Total Asset Turnover Ratio = 15,790,000 / 15435000 = 1.02 times

Last year

A. Working Capital = Current assets - Current Liabilities

= 5,430,000- 2,840,000 = 2590000

B. Current Ratio= Current Assets / Current Liabilities

= 5,430,000/ 2,840,000= 1.91 times

C. Acid test ratio= (Cash+ Marketable securities+ Accounts Receivable) / Current Liabilities

= 2950000/ 2840000 = 1.04 times

D. Accounts Receivable turnover ratio= Net credit sales/ Average Accounts Receivable

Average Accounts Receivable = (1,600,000+1,520,000) /2 = 1560000

Accounts Receivable turnover ratio = 12,880,000/ 1560000= 8.26 times

Average Collection Period = 365 days/ Accounts Receivable turnover ratio

= 365/ 8.26= 44.19 days

E. Average sales period = (Average Inventory x 365) / Cost of sales

Average Inventory = (1,960,000+2,300,000)/2 = 2130000

Average sales period = (2130000 x 365) / 9,660,000= 80.48 days

F. Operating cycle = Average collection period + Average sales period

= 44.19+ 80.48= 124.67 days

G. Total Asset Turnover Ratio= Net sales/ Average Total Assets

Average total assets = (13,000,000+14,410,000) /2 = 13705000

Total Asset Turnover Ratio = 12,880,000/ 13705000 = .94 times