In: Accounting
Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6]
[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 |
||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 920,000 | $ | 1,160,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,540,000 | 1,640,000 | ||
Inventory | 3,560,000 | 2,100,000 | ||
Prepaid expenses | 250,000 | 190,000 | ||
Total current assets | 7,270,000 | 5,390,000 | ||
Plant and equipment, net | 9,440,000 | 9,010,000 | ||
Total assets | $ | 16,710,000 | $ | 14,400,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,970,000 | $ | 2,900,000 |
Note payable, 10% | 3,640,000 | 3,040,000 | ||
Total liabilities | 7,610,000 | 5,940,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,600,000 | 960,000 | ||
Total stockholders' equity | 9,100,000 | 8,460,000 | ||
Total liabilities and stockholders' equity | $ | 16,710,000 | $ | 14,400,000 |
Lydex Company Comparative Income Statement and Reconciliation |
||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,820,000 | $ | 13,180,000 |
Cost of goods sold | 12,656,000 | 9,885,000 | ||
Gross margin | 3,164,000 | 3,295,000 | ||
Selling and administrative expenses | 1,400,000 | 1,588,000 | ||
Net operating income | 1,764,000 | 1,707,000 | ||
Interest expense | 364,000 | 304,000 | ||
Net income before taxes | 1,400,000 | 1,403,000 | ||
Income taxes (30%) | 420,000 | 420,900 | ||
Net income | 980,000 | 982,100 | ||
Common dividends | 340,000 | 491,050 | ||
Net income retained | 640,000 | 491,050 | ||
Beginning retained earnings | 960,000 | 468,950 | ||
Ending retained earnings | $ | 1,600,000 | $ | 960,000 |
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 | 1.1 | |
Average collection period | 40 | days |
Average sale period | 60 | days |
Return on assets | 8.8 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.8 | |
Price-earnings ratio | 10 | |
Problem 15-15 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 $1,630,000.) (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 $1,990,000.) (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 $14,570,000.) (Round your final answers to 2 decimal places.
Answer a.
Working Capital = Current Assets - Current Liabilities
This Year:
Working Capital = $7,270,000 - $3,970,000
Working Capital = $3,300,000
Last Year:
Working Capital = $5,390,000 - $2,900,000
Working Capital = $2,490,000
Answer b.
Current Ratio = Current Assets / Current Liabilities
This Year:
Current Ratio = $7,270,000 / $3,970,000
Current Ratio = 1.83
Last Year:
Current Ratio = $5,390,000 / $2,900,000
Current Ratio = 1.86
Answer c.
Acid-test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
This Year:
Acid-test Ratio = ($7,270,000 - $3,560,000 - $250,000) /
$3,970,000
Acid-test Ratio = 0.87
Last Year:
Acid-test Ratio = ($5,390,000 - $2,100,000 - $190,000) /
$2,900,000
Acid-test Ratio = 1.07
Answer d
Average Collection Period = 365 * Average Accounts Receivable / Sales
This Year:
Average Accounts Receivable = ($2,540,000 + $1,640,000) /
2
Average Accounts Receivable = $2,090,000
Average Collection Period = 365 * $2,090,000 / $15,820,000
Average Collection Period = 48.22 days
Last Year:
Average Accounts Receivable = ($1,640,000 + $1,630,000) /
2
Average Accounts Receivable = $1,635,000
Average Collection Period = 365 * $1,635,000 / $13,180,000
Average Collection Period = 45.28 days