In: Accounting
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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 |
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This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 960,000 | $ | 1,200,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,700,000 | 1,800,000 | ||
Inventory | 3,600,000 | 2,000,000 | ||
Prepaid expenses | 260,000 | 200,000 | ||
Total current assets | 7,520,000 | 5,500,000 | ||
Plant and equipment, net | 9,520,000 | 9,050,000 | ||
Total assets | $ | 17,040,000 | $ | 14,550,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 4,010,000 | $ | 2,980,000 |
Note payable, 10% | 3,660,000 | 3,060,000 | ||
Total liabilities | 7,670,000 | 6,040,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,870,000 | 1,010,000 | ||
Total stockholders' equity | 9,370,000 | 8,510,000 | ||
Total liabilities and stockholders' equity | $ | 17,040,000 | $ | 14,550,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,860,000 | $ | 13,580,000 |
Cost of goods sold | 12,688,000 | 10,185,000 | ||
Gross margin | 3,172,000 | 3,395,000 | ||
Selling and administrative expenses | 1,006,000 | 1,604,000 | ||
Net operating income | 2,166,000 | 1,791,000 | ||
Interest expense | 366,000 | 306,000 | ||
Net income before taxes | 1,800,000 | 1,485,000 | ||
Income taxes (30%) | 540,000 | 445,500 | ||
Net income | 1,260,000 | 1,039,500 | ||
Common dividends | 400,000 | 519,750 | ||
Net income retained | 860,000 | 519,750 | ||
Beginning retained earnings | 1,010,000 | 490,250 | ||
Ending retained earnings | $ | 1,870,000 | $ | 1,010,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Current ratio | 2.4 | |
Acid-test ratio | 1.1 | |
Average collection period | 40 | days |
Average sale period | 60 | days |
Return on assets | 9.3 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
Price-earnings ratio | 10 | |
Problem 14-15 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 $1,670,000.) (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 $2,030,000.) (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 $14,610,000.) (Round your final answers to 2 decimal places.)
a) | Working Capital = Current Assets Current Liabilities | |||
This Year | Last Year | |||
= $7520000-4010000 | = $5500000-2980000 | |||
$ 35,10,000 | $ 25,20,000 | |||
b) | ||||
Current Ratio = Current Assets / Current Liabilities | ||||
This Year | Last Year | |||
= $7520000/4010000 | = $5500000/2980000 | |||
=1.88 times | =1.85 times | |||
c) | Acid Test = Quick Assets / Current Liabilities | |||
This Year | Last Year | |||
= $3660000/4010000 | = $3300000/2980000 | |||
=0.91 times | =1.11 times | |||
d) | Average Account Receivables = (beginning Account Receivables + ending Account Receivables)/2 | |||
This Year | Last Year | |||
= ( $1800000+2700000)/2 | = ( $1800000+1670000)/2 | |||
= $ 2250000 | = $ 1735000 | |||
Account Receivables Turnover Ratio = Sales / average Account Receivables | ||||
This Year | Last Year | |||
= $15860000/2250000 | = $13580000/1735000 | |||
=7.05 times | =7.83 times | |||
Average Collection Period = 365/ Account Receivables turnover ratio | ||||
This Year | Last Year | |||
= 365 days /7.05 | = 365 days /7.83 | |||
=51.77 days | =46.62 days | |||
e) | Average Inventory = (beginning inventory + ending inventory)/2 | |||
This Year | Last Year | |||
= ( $2000000+3600000)/2 | = ( $2030000+2000000)/2 | |||
= $ 2800000 | = $ 2015000 | |||
Inventory Turnover Ratio = Cost of goods sold / average inventory | ||||
This Year | Last Year | |||
= $12688000/2800000 | = $10185000/2015000 | |||
=4.53 times | =5.05 times | |||
Average Sales Period= 365/ inventory turnover ratio | ||||
This Year | Last Year | |||
= 365 days /4.53 | = 365 days /5.05 | |||
=80.57 days | =72.28 days | |||
f) | The operating cycle.= Average sales period + Average collection period | |||
This Year | Last Year | |||
=80.57+51.77 | =72.28+46.62 | |||
=132.34 days | =118.90 days | |||
g) | Average Assets = (beginning Assets + ending Assets)/2 | |||
This Year | Last Year | |||
= ( $14550000+17040000)/2 | = ( $14610000+14550000)/2 | |||
= $ 15795000 | = $ 14580000 | |||
Assets Turnover Ratio = Sales / average Assets | ||||
This Year | Last Year | |||
= $15860000/15795000 | = $13580000/14580000 | |||
=1 times | =0.93 times |