Question

Required information [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 $ 880,000 $ 1,120,000 Marketable securities 0 300,000 Accounts receivable, net 2,380,000 1,480,000 Inventory 3,520,000 2,200,000 Prepaid expenses 240,000 180,000 Total current assets 7,020,000 5,280,000 Plant and equipment, net 9,360,000 8,970,000 Total assets $ 16,380,000 $ 14,250,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,930,000 $ 2,820,000 Note payable, 10% 3,620,000 3,020,000 Total liabilities 7,550,000 5,840,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 1,330,000 910,000 Total stockholders' equity 8,830,000 8,410,000 Total liabilities and stockholders' equity $ 16,380,000 $ 14,250,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,780,000 $ 12,780,000 Cost of goods sold 12,624,000 9,585,000 Gross margin 3,156,000 3,195,000 Selling and administrative expenses 1,794,000 1,572,000 Net operating income 1,362,000 1,623,000 Interest expense 362,000 302,000 Net income before taxes 1,000,000 1,321,000 Income taxes (30%) 300,000 396,300 Net income 700,000 924,700 Common dividends 280,000 462,350 Net income retained 420,000 462,350 Beginning retained earnings 910,000 447,650 Ending retained earnings $ 1,330,000 $ 910,000 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 8.4 % Debt-to-equity ratio 0.7 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: Working capital. The current ratio. (Round your final answers to 2 decimal places.) The acid-test ratio. (Round your final answers to 2 decimal places.) The average collection period. (The accounts receivable at the beginning of last year totaled $1,590,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.) The average sale period. (The inventory at the beginning of last year totaled $1,950,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.) The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.) The total asset turnover. (The total assets at the beginning of last year totaled $14,530,000.) (Round your final answers to 2 decimal places.)

Answer 1

1	Working capital = Current asset - current liabilities	This year	Last year
	Current assets	7020000	5280000
	Current liabilities	3930000	2820000
	Working capital	3090000	2460000
2	Current ratio = Current assets / current Liabilities
	Current assets	7020000	5280000
	Current liabilities	3930000	2820000
	Current ratio	1.8	1.9
3	Acid test ratio = (current assets - inventory )/ current liabilities
	Acid test (7020000-3520000-240000)	3260000	2900000
	Current liabilities	3930000	2820000
	Acid test ratio	0.8	1.0
4	Receivable turnover = Net sales / Average accounts receivable
	Net sales	15780000	12780000
	Beginning accounts receivable	1480000	1590000
	Ending accounts receivable	2380000	1480000
	Average accounts receivable	1930000	1535000
	Average accounts receivable = (Beginning + ending )/2
	Receivable turnover	8.18	8.33
5	Days sales uncollected = 365 / accounts receivable tunover
	Days sales uncollected	44.64	43.84	Days
6	Inventory turnover = Cost of goods sold / Average inventory
	Cost of goods sold	12624000	9585000
	Beginning inventory	2200000	1950000
	Ending inventory	3520000	2200000
	Average inventory	2860000	2075000
	Average inventory = (Beginning + Ending )/2
	Inventory turnover	4.41	4.62
7	Days sale in inventory = 365 / inventory turnover
	Days sales in inventory	82.69	79.02	Days
8	Operating cycle = Days sales uncollected + days sales in inventory
	Days sales uncollected	44.64	43.84
	Days sales in inventory	82.69	79.02
	Operating cycle	127.33	122.86
9	Assets turnover ratio = Net sales / average total assets
	Net sales	15780000	12780000
	Beginning total assets	14250000	14530000
	Ending total assets	16380000	14250000
	Average total assets	15315000	14390000
	Assets turnover ratio	1.03	0.89