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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	$	1,010,000	$	1,250,000
Marketable securities		0		300,000
Accounts receivable, net		2,900,000		2,000,000
Inventory		3,650,000		2,000,000
Prepaid expenses		270,000		210,000
Total current assets		7,830,000		5,760,000
Plant and equipment, net		9,620,000		9,100,000
Total assets	$	17,450,000	$	14,860,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,060,000	$	3,080,000
Note payable, 10%		3,700,000		3,100,000
Total liabilities		7,760,000		6,180,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,690,000		1,680,000
Total stockholders' equity		9,690,000		8,680,000
Total liabilities and stockholders' equity	$	17,450,000	$	14,860,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,910,000	$	14,080,000
Cost of goods sold		12,728,000		10,560,000
Gross margin		3,182,000		3,520,000
Selling and administrative expenses		912,000		1,624,000
Net operating income		2,270,000		1,896,000
Interest expense		370,000		310,000
Net income before taxes		1,900,000		1,586,000
Income taxes (30%)		570,000		475,800
Net income		1,330,000		1,110,200
Common dividends		320,000		555,100
Net income retained		1,010,000		555,100
Beginning retained earnings		1,680,000		1,124,900
Ending retained earnings	$	2,690,000	$	1,680,000

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	32	days
Average sale period	60	days
Return on assets	9.8	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
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 $1,720,000.) (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 $2,080,000.) (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 $14,660,000.) (Round your final answers to 2 decimal places.)

Answer 1

a: Working capital:
	This year	Last year
Total current assets	7830000	5760000
Less: Total current liabilities	4060000	3080000
Working capital	3770000	2680000

Working capital has increased significantly in this year compare to the working capital of last year thus, the ability of the company to expand its operations has certainly improved in this year.   

b: Current ratio:
	This year	Last year
Current assets
Cash	1010000	1250000
Marketable securities	0	300000
Accounts receivable, net	2900000	2000000
Inventory	3650000	2000000
Prepaid expenses	270000	210000
(A): Total current assets	7830000	5760000
(B): Total current liabilities	4060000	3080000
Current ratio (A/B)
(7830000 / 4060000)	1.93
(5760000 / 3080000)		1.87

The current ratio of this year is 1.93 is better than the previous year of 1.87 hence, it shows that the liquidity position of the company in this year has improved.

C: Acid test ratio:
	This year	Last year
Current assets
Cash	1010000	1250000
Marketable securities	0	300000
Accounts receivable, net	2900000	2000000
Inventory	3650000	2000000
Prepaid expenses	270000	210000
Total current assets	7830000	5760000
Less: Inventories	3650000	2000000
(A): Current assets less inventories	4180000	3760000
(B): Total current liabilities	4060000	3080000
Acid test ratio (A/B)
(4180000 / 4060000)	1.03
(3760000 / 3080000)		1.22

However, the acid test ratio of the company has deteriorated a bit which indicate that the ability of the company to liquidate its inventory has deteriorated a bit compare to the previous year.

d: The average collection period:
	This year	Last year
Average receivable:
Opening accounts receivable	2000000	1720000
Add: Closing accounts receivable	2900000	2000000
Aggregate receivables	4900000	3720000
Average receivable:
(4900000 / 2)	2450000
(3720000/2)		1860000
Sales	15910000	14080000
The average collection period (In days)
(2450000 x 365 / 15910000)	56.21
(18600000 x 365/14080000)		48.22
e: Average sale period:
	This year	Last year
Average inventory:
Opening inventory	2000000	2080000
Add: Closing inventory	3650000	2000000
Aggregate of opening and closing inventory	5650000	4080000
Average inventory:
(5650000 / 2)	2825000
(4080000 / 2)		2040000
Sales	15910000	14080000
Average sale period (In days)
(2825000 x 365/15910000)	64.81
(2040000 x 365/14080000)		52.88
f: Operating cycle:
	This year	Last year
Average sales period	64.81 days	52.88 days
Add: Average collection period	56.21 days	48.22 days
Operating cycle (IN days)	121.02	101.1
g: The total asset turnover ratio:
	This year	Last year
Opening total assets	14860000	14660000
Add: Closing total assets	17450000	14860000
Aggregate of total assets	32310000	29520000
Average total assets
(32310000/ 2)	16155000
(29520000/2)		14760000
Sales	15910000	14080000
Total asset turnover ratio
(15910000/16155000)	0.98
(14080000/14760000)		0.95

The above ratios clearly indicate that the operating efficiency of the company have improved in this year as all the operating ratios have improved in this year compare to the operating ratios of last year.