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: Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses $ 1,000,000 $ 1,240,000 300,000 1,960,000 2,400,000 210,000 0 2,860,000 3,640,000 270,000 Total current assets Plant and equipment, net 7,770,000 9,600,000 6,110,000 9,090,000 Total assets $17,370,000 $15,200,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% $ 4,050,000 3,700,000 $ 3,060,000 3,100,000 Total liabilities 7,750,000 6,160,000 Stockholders' equity: Common stock, $75 par value Retained earnings 7500,000 2,120,000 7500,000 1,540,000 Total stockholders' equity 9,620,000 9,040,000 Total liabilities and stockholders' equity $17,370,000 $15,200,000

Explanation / Answer

(a) Working capital = Current assets - Current liabilities

Last year: $(6,110,000 - 3,060,000) = $3,050,000

This year: $(7,770,000 - 4,050,000) = $3,720,000

(b) Current ratio = Current assets / Current liabilities

Last year: (6,110,000 / 3,060,000) = 2.00

This year: (7,770,000 / 4,050,000) = 1.92

(c) Acid test ratio = (Current assets - Inventory) / Current liabilities

Last year: (6,110,000 - 2,400,000) / 3,060,000 = 1.21

This year: (7,770,000 - 3,640,000) / 4,050,000 = 1.02

(d) Average collection period = 365 x Average accounts receivable / Sales revenue

Last year: 365 x [(1,760,000 + 1,960,000) / 2] /13,980,000 = 47.91 days

This year: 365 x [(2,860,000 + 1,960,000) / 2] / 15,900,000 = 55.32 days

(e) Average sale period = 365 x Average inventory / COGS

Last year: 365 x [(2,070,000 + 2,400,000) / 2] / 10,485,000 = 77.80 days

This year: 365 x [(3,640,000 + 2,400,000) / 2] / 12,720,000 = 86.66 days

(f) Operating cycle = Average sale period - Average collection period

Last year: 77.80 - 47.91 = 29.89 days

This year: 86.66 - 55.32 = 31.34 days

(g) Total asset turnover = Sales revenue / Average total assets

Last year: 13,980,000 / [(14,650,000 + 15,200,000) / 2] = 0.94

This year: 15,900,000 / [(17,370,000 + 15,200,000) / 2] = 0.98

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