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	$	950,000	$	1,190,000
Marketable securities		0		300,000
Accounts receivable, net		2,660,000		1,760,000
Inventory		3,590,000		2,400,000
Prepaid expenses		260,000		200,000
Total current assets		7,460,000		5,850,000
Plant and equipment, net		9,500,000		9,040,000
Total assets	$	16,960,000	$	14,890,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,000,000	$	2,960,000
Note payable, 10%		3,660,000		3,060,000
Total liabilities		7,660,000		6,020,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,300,000		1,870,000
Total stockholders' equity		9,300,000		8,870,000
Total liabilities and stockholders' equity	$	16,960,000	$	14,890,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,850,000	$	13,480,000
Cost of goods sold		12,680,000		10,110,000
Gross margin		3,170,000		3,370,000
Selling and administrative expenses		1,704,000		1,600,000
Net operating income		1,466,000		1,770,000
Interest expense		366,000		306,000
Net income before taxes		1,100,000		1,464,000
Income taxes (30%)		330,000		439,200
Net income		770,000		1,024,800
Common dividends		340,000		512,400
Net income retained		430,000		512,400
Beginning retained earnings		1,870,000		1,357,600
Ending retained earnings	$	2,300,000	$	1,870,000

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	9.2	%
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 $1,660,000.) (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 $2,020,000.) (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 $13,060,000.) (Round your final answers to 2 decimal places.)

This Year_____ , Last Years _____

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

S No	Particulars	Formula	This year	Last Year
a	Working capital	Current Assets-Current Liabilities	$3,460,000	$2,890,000
b	The Current Ratio	Current Assets/ Current Liabilities	1.87	1.98
c	The Acid-test ratio	Current liquid assets/ Total Current liabilities	0.90	1.10
d	The average collection period days	Average Accounts receivable*365 / Net sales	49.74 days	59.84 days
e	The average sale period days	Average inventory*365 / Cost of goods sold	80.74 days	108.13 days
f	The operating cycle days	Average collection period days + average sale period days	130.48 days	167.97 days
g	The total asset turnover	Total sales/ Average of total assets	1.06	0.85