2. You decide, finally, to asses the company\'s liquidity and asset management.

ID: 2453854 • Letter: 2

Question

2. You decide, finally, to asses the company's liquidity and asset management. For both this year and last year, compute:

a.) Working Capital

b.) The current ratio

c.) The acid-test ratio

d.) The average collection period. (The accounts receivable at the beginning of last year totaled $1,560,000.)

Lydex Company Comparative Balance Sheet Assets This Year Last Year Current Assets: Cash… $960,000 $1,260,000 Marketable Securities… 0 300,000 Accounts receivable, net... 2,700,000 1,800,000 Inventory… 3,900,000 2,400,000 Prepaid Expenses… 240,000 180,000 Total Current assets… 7,800,000 5,940,000 Plant and Equipment, net… 9,300,000 8,940,000 Total Assets… 17,100,000 14,880,000 Liabilities and Stockholders'Equity Liabilities: Current libabilities... $3,900,000 $2,760,000 Note payable, 10%... 3,600,000 3,000,000 Total liabilities… 7,500,000 5,760,000 Stockholders' equity: Common stock $78 par value… 7,800,000 7,800,000 Retained Earnings… 1,800,000 1,320,000 Total stockholders' equity… 9,600,000 9,120,000 Total liabilities and stockholders' equity… $17,100,000 $14,880,000 Lydex Company Comparative Income Statement & Reconciliation Sales( all on account)… $15,570,000 $12,480,000 Cost of goods sold… 12,600,000 9,900,000 Gross Margin… 3,150,000 2,580,000 Selling and administrative expenses… 1,590,000 1,560,000 Net operating income… 1,560,000 1,020,000 Interest expense… 360,000 300,000 Net income before taxes… 1,200,000 720,000 Income taxes (30%)… 360,000 216,000 Net income… 840,000 504,000 Common dividends… 360,000 252,000 Net income retained… 480,000 252,000 Beginning retained earnings… 1,320,000 1,068,000 Ending retained earnings… 1,800,000 1,320,000 Financial data and Ratios that are typical of companies in Lydex Company Industry: Current Ratio 2.3 Acid-test ratio 1.2 Average collection period 30 days Average sale period 60 days Return on assets 9.50% Debt-to-equity ratio 0.65 Times interest earned ratio 5.7 Prices-earnings ratio 10

Explanation / Answer

Working Capital = Current Assets – Current Liabilities

A)Working Capital for Current year = 7800,000 – 3900,000

=$3900,00

Working Capital for Last Year = 5940,000 – 2760,000

=$3180,000

Current Ratio = Current Assets/Current Liabilities

b)Current Ratio for the current year = 7800,000/3900,000

= 2

Current ratio for the last year = 5940,000/2760,000

= 2.15

Acid Test Ratio = (Current Assets – Inventory – Prepaid Expenses)/Current Liabilities

c)Acid-Test Ratio for Current year = (7800,000 – 240,000-3900,000)/3900,000

= 0.94

Acid-Test Ratio for Last year = (5940,000 – 180,000 – 2400,000)/2760,000

= 1.22

d)Average Collection Period = 360/[Sales/Accounts Recevable at the end of the year ]

Average Collection Period for the current year = 360/[15570,000/2700,000]

= 360/5.7666

= 62.43 days

Average Collection Period for the last year = 360/[12480,000/1800,000]

= 360/6.933333

= 51.92 days