You have just been hired as a financial analyst for Lydex Company, a manufacture

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:

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

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 $1,600,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

e. The average sale period. (The inventory at the beginning of last year totaled $1,960,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

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

g. The total asset turnover. (The total assets at the beginning of last year totaled $14,540,000.) (Round your final answers to 2 decimal places.)

Lydex Company
Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 890,000 $ 1,130,000 Marketable securities 0 300,000 Accounts receivable, net 2,420,000 1,520,000 Inventory 3,530,000 2,300,000 Prepaid expenses 240,000 180,000 Total current assets 7,080,000 5,430,000 Plant and equipment, net 9,380,000 8,980,000 Total assets $ 16,460,000 $ 14,410,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,940,000 $ 2,840,000 Note payable, 10% 3,620,000 3,020,000 Total liabilities 7,560,000 5,860,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 1,900,000 1,550,000 Total stockholders' equity 8,900,000 8,550,000 Total liabilities and stockholders' equity $ 16,460,000 $ 14,410,000

Explanation / Answer

Lydex Company This Year Last Year a) Working Capital=Current Assets-Current Liabilities Total Current Assets=(A) $                                     70,80,000.00 $                             54,30,000.00 Total Current Liabilities=(B) $                                     39,40,000.00 $                             28,40,000.00 Working Capital=(A)-(B) $                                     31,40,000.00 $                             25,90,000.00 b) Total Current Assets=(A) $                                     70,80,000.00 $                             54,30,000.00 Total Current Liabilities=(B) $                                     39,40,000.00 $                             28,40,000.00 Current Ratio=Current Assets/Current Liabilities=(A)/(B) 1.80 1.91 c ) Acid Test Ratio=(Total Current Assets-Inventory-Prepaid Expenses)/Current Liabilities (7080000-240000-3530000)/3940000 (5430000-2300000-180000)/2840000 0.84 1.04 d) Accounts Receivable Turnover=Credit Sales/Average Accounts Receivable Credit Sales=(A) $                                 1,57,90,000.00 $                          1,28,80,000.00 Beginning Accounts Recivable $                                     15,20,000.00 $                             16,00,000.00 Ending Accounts Receivable $                                     24,20,000.00 $                             15,20,000.00 Average Accounts Receivable=(Beginning Accounts Receivable+Ending Accounts Receivable)/2=(B) $                                     19,70,000.00 $                             15,60,000.00 Accounts Receivable Turnover=(A)/(B) 8.02 Times 8.26 Times The Average Collection Period=365/Accounts Receivable Turnover 45.54 Days 44.21 Days e) Days Sales in Inventory=365/Inventory turoner ratio Cost of goods sold=(A) $                                 1,26,32,000.00 $                             96,60,000.00 Average Inventory=(Beginning Inventory+Ending Inventory)/2 Beginning Inventory $                                     23,00,000.00 $                             19,60,000.00 Ending Inventory $                                     35,30,000.00 $                             23,00,000.00 Average Inventory=(B) $                                     29,15,000.00 $                             21,30,000.00 Inventory Turnover=(A)/(B) 4.33 4.54 Days Sales in Inventory 84.30 Days 80.40 Days f) Operating Cycle=(365/Accounts Receivable)+(365/Inventory Turnover) 129.83 Days 124.60 Days (45.54) Days+(84.30) Days 44.21)Days+80.40 Days g) Total Assets Turnover=Net Sales/Average Assets Average Assets=(Opening Assets+closing Assets)/2 Sales $                                 1,57,90,000.00 $                          1,28,80,000.00 Opening Assets $                                 1,44,10,000.00 $                          1,45,40,000.00 Closing Assets $                                 1,64,60,000.00 $                          1,44,10,000.00 Average Assets= $                                 1,54,35,000.00 $                          1,44,75,000.00 Total Assets Turnover= 1.02 Times 0.89 Times

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