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 $ 1,030,000 $ 1,270,000 Marketable securities 0 300,000 Accounts receivable, net 2,980,000 2,080,000 Inventory 3,670,000 2,200,000 Prepaid expenses 270,000 210,000 Total current assets 7,950,000 6,060,000 Plant and equipment, net 9,660,000 9,120,000 Total assets $ 17,610,000 $ 15,180,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,080,000 $ 3,120,000 Note payable, 10% 3,720,000 3,120,000 Total liabilities 7,800,000 6,240,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,810,000 1,940,000 Total stockholders' equity 9,810,000 8,940,000 Total liabilities and stockholders' equity $ 17,610,000 $ 15,180,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,930,000 $ 14,280,000 Cost of goods sold 12,744,000 10,710,000 Gross margin 3,186,000 3,570,000 Selling and administrative expenses 1,114,000 1,632,000 Net operating income 2,072,000 1,938,000 Interest expense 372,000 312,000 Net income before taxes 1,700,000 1,626,000 Income taxes (30%) 510,000 487,800 Net income 1,190,000 1,138,200 Common dividends 320,000 569,100 Net income retained 870,000 569,100 Beginning retained earnings 1,940,000 1,370,900 Ending retained earnings $ 2,810,000 $ 1,940,000 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 1.1 Average collection period 32 days Average sale period 60 days Return on assets 8.5 % 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:

a) Working capital.

b )The current ratio and The acid-test ratio(Round your final answers to 2 decimal places.)

c) The average sale period. (The inventory at the beginning of last year totaled $2,100,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal places.)

d) The operating cycle. (Round your intermediate calculations and final answers to 2 decimal place.)

Answer 1

		This Year	Last Year
	Working Capital =Current Assets - Current Liabilities
	Working Capital =$7,950,000 - $4,080,000	$ 38,70,000
	Working Capital =$6,060,000 - $3,120,000		$     29,40,000
	Current Ratio =Current Assets / Current liabilties
	Current Ratio =$7,950,000 / $4,080,000	1.95
	Current Ratio =$6,060,000 / $3,120,000		1.94
	Acid-test Ratio =[(Current Assets - Inventories - Prepaid expenses)/Current laibilities]
	Acid-test Ratio =($7,950,000 - $3,670,000 - $270,000) / $4,080,000	0.98
	Acid-test Ratio =($6,060,000 - $2,200,000 - $210,000) / $3,120,000		1.17
	Average accounts receivable =(Beginning Accounts Receivable+Clsoing Accounts Receivable)/2	$ 25,30,000	$     20,80,000
	Accounts receivable turnover =Net sales / Average accounts receivable	6.30	6.87
	Average collection period =365 days/Accounts receivable turnover	57.94 days	53.12 days
	Average Inventory =(Opening Inventory + Closing Inventory)/2	2935000	2150000
	Inventory Turnover ratio =Cost of goods sold / Average Inventory	4.34	4.98
	Avearage Sales period =365 days / Inventory Turnover ratio	84.10 days	73.74 days
	Operating Cycle =Inventory Period + Accounts receivable period	142.04 days	126.86 days
	Note:The Opening Accounts Receivable for last year is not given, hence the same is calculated by taking the Closing Account Receivable