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 $ 940,000 2,620,000 3,580,000 250,000 7,390,000 9,480,000 $ 16,870,000 $ 1,180,000 300,000 1,720,000 2,300,000 190,000 5,690,000 9,030,000 $14,720,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% Total liabilities Stockholders' equity: Common stock, $75 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 3,990,000 3,660,000 7,650,000 2,940,000 3,060,000 6,000,000 7,500,000 1,720,000 9,220,000 $ 16,870,000 7,500,000 1,220,000 8,720,000 $14,720,000

Answer 1

Ans. A	Working capital =     Total current assets - Total current liabilities
	This year	$7,390,000 - $3,990,000	$3,400,000
	Last year	$5,690,000 - $2,940,000	$2,750,000
Ans. B	Current ratio   =   Total current assets / Total current liabilities
	This year	$7,390,000 / $3,990,000	1.85 : 1
	Last year	$5,690,000 / $2,940,000	1.94 : 1
Ans. C	Quick ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	This year	($7,390,000 - $3,580,000 - $250,000) / $3,990,000	0.89 : 1
	Last year	($5,690,000 - $2,300,000 - $190,000) / $2,940,000	1.09 : 1
Ans. D	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	This year	365 / $15,840,000 * $2,170,000	50.00	days
	Last year	365 / $13,380,000 * $1,685,000	45.97	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	This year	($1,720,000 + $2,620,000) / 2	$2,170,000
	Last year	($1,650,000 + $1,720,000) / 2	$1,685,000
Ans. E	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	This year	365 / $12,672,000 * $2,940,000	84.68	days
	Last year	365 / $10,035,000 * $2,155,000	78.38	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	This year	($2,300,000 + $3,580,000) / 2	$2,940,000
	Last year	($2,010,000 + $2,300,000) / 2	$2,155,000
Ans. F	Operating cycle = Average collection period + Average sales period
	This year	50.00 + 84.67	134.67	days
	Last year	45.97 + 78.38	124.35	days
Ans. G	Total assets turnover = Sales / Average operating assets
	This year	$15,840,000 / $15,795,000	1.00	times
	Last year	$13,380,000 / $14,655,000	0.91	times
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($14,720,000 + $16,870,000) / 2	$15,795,000
	Last year	($14,590,000 + $14,720,000) / 2	$14,655,000