Question

Problem 14-15 Comprehensive Ratio Analysis (LO14-2, LO14-3, LO14-4, LO14-5, LO14-6) [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: Last Year Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 970,000 Marketable securities Accounts receivable, net 2,740,000 Inventory 3,610,000 Prepaid expenses 260.000 Total current assets 7,580,000 Plant and equipment, net 9.540,000 Total assets $17.120.000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,020,000 Note payable, 108 3,680,000 Total liabilities 7.700.000 Stockholders' equity: Common stock, $70 par value 7.000.000 Retained earnings 2.420.000 Total stockholders' equity 9,420,000 Total liabilities and stockholders' equity $17, 120,000 $ 1.210.000 300,000 1,840.000 2.100,000 200,000 5,650,000 9,060,000 $14.710.000 $3,000,000 3,080,000 6,080.000 7.000.000 1.630,000 3,630,000 $14,710,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $15,870,000 $13.680.000 Cost of goods sold 12.696.000 10,260,000 Gross margin 3, 174,000 3,420,000 Selling and administrative expenses 1,106,000 1,600,000 Net operating income 2.068,000 1,812,000 Interest expense 368.000 300,000 Net Income before taxes 1.700.000 1,504,000 Income taxes (30%) 510.000 451,200 Net Income 1,190,000 1,052,800 Common dividends 400,000 526,400 Net income retained 790.000 526,400 Beginning retained earnings 1,630,000 1,103,600 Ending retained earnings $ 2,420,000 $1,630,000 To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company's industry: Current ratio Acid-test ratio Average collection period Average sale period Return on assets Debt-to-equity ratio Times interest earned ratio Price-earnings ratio 40 days 60 days 9.43 0.7 5.7

Answer 1

Ans. A	Working capital =     Total current assets - Total current liabilities
	This year	$7,580,000 - $4,020,000	3560000
	Last year	$5,650,000 - $3,000,000	2650000
Ans. B	Current ratio   =   Total current assets / Total current liabilities
	This year	$7,580,000 / $4,020,000	1.83 : 1
	Last year	$5,650,000 / $3,000,000	1.86 : 1
Ans. C	Quick ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	This year	($7,580,000 - $3,610,000 - $260,000) / $4,020,000	0.92 : 1
	Last year	($5,650,000 - $2,100,000 - $200,000) / $3,000,000	1.12 : 1
Ans. D	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	This year	365 / $15,870,000 * $2,290,000	52.67	days
	Last year	365 / $13,680,000 * $1,760,000	46.96	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	This year	($1,840,000 + $2,740,000) / 2	$2,290,000
	Last year	($1,680,000 + $1,840,000) / 2	$1,760,000
Ans. E	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	This year	365 / $12,696,000 * $2,855,000	82.08	days
	Last year	365 / $10,260,000 * $2,070,000	73.64	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	This year	($2,100,000 + $3,610,000) / 2	$2,855,000
	Last year	($2,040,000 + $2,100,000) / 2	$2,070,000
Ans. F	Operating cycle = Average collection period + Average sales period
	This year	52.67 + 82.08	134.75	days
	Last year	46.96 + 73.64	120.60	days
Ans. G	Total assets turnover = Sales / Average operating assets
	This year	$15,870,000 / $15,915,000	1.00	times
	Last year	$13,680,000 / $14,665,000	0.93	times
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($14,710,000 + $17,120,000) / 2	$15,915,000
	Last year	($14,620,000 + $14,710,000) / 2	$14,665,000