Question

14-15 p3 Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	980,000	$	1,220,000
Marketable securities		0		300,000
Accounts receivable, net		2,780,000		1,880,000
Inventory		3,620,000		2,200,000
Prepaid expenses		260,000		200,000
Total current assets		7,640,000		5,800,000
Plant and equipment, net		9,560,000		9,070,000
Total assets	$	17,200,000	$	14,870,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,030,000	$	3,020,000
Note payable, 10%		3,680,000		3,080,000
Total liabilities		7,710,000		6,100,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		1,990,000		1,270,000
Total stockholders' equity		9,490,000		8,770,000
Total liabilities and stockholders' equity	$	17,200,000	$	14,870,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,880,000	$	13,780,000
Cost of goods sold		12,704,000		10,335,000
Gross margin		3,176,000		3,445,000
Selling and administrative expenses		1,208,000		1,612,000
Net operating income		1,968,000		1,833,000
Interest expense		368,000		308,000
Net income before taxes		1,600,000		1,525,000
Income taxes (30%)		480,000		457,500
Net income		1,120,000		1,067,500
Common dividends		400,000		533,750
Net income retained		720,000		533,750
Beginning retained earnings		1,270,000		736,250
Ending retained earnings	$	1,990,000	$	1,270,000

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	32	days
Average sale period	60	days
Return on assets	9.5	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
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 $1,690,000.) (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 $2,050,000.) (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 $14,630,000.) (Round your final answers to 2 decimal places.)

Answer 1

Solution : loy w orking capital Total current assets - Total current liabilities Last year $5.800,000 - 3,020,000 7 2,780,000 This year $ 7,640,000 - 4,030000 $ 3, 610,000 (2) Current ratio: Total current Total current assets liabilities This year $ 7,640,000 $ 4,030,000 = 1.90 times. (3) Quick ratio! Last year $ 5,800,000 $ 3,020,000 1.92 times. > Quick assets Current liabilities This year Last year $ 3,760,000 $ 3,400,000 $ 4,030, ooo $ 3,020,000 0.93 times - 1.13 times.

Quick assets & cash & marketable securities Accounts receivable Avarage collection period! Avarage accounts Xeceivable saler Coo account) This year: 2,780,000+ Lero.000 2 x 365 $ 15,880,000 53.55 days Last year! 1880,000 + 1,690, DOO X365 13,780,000 47.28 days. re) Avarage sale period! X 365 Avarage inventory cost of goods sold This year: [3,620,000+ 2,200.000 x 365 12,704, 000 83. 61 days

Last year! 2.200,000 +2,050.000 X 365 10,335,000 75.05 days f) operating cycle! Avarage collection period + Avarage sale period This year 53.55 +83.61 = 137.16 days Last year 47.28 + 75.05 => 122.33 days (9) Total asset turnover. Sales Avarage total assets This year Last year $ 15,880,000 11 200.000 + 14,870,000 $ 13,780,000 riu870,ooo +14, 630,000 2 - 0.99 times = 0.93 times.