Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed below.] 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 $ 880,000 $ 1,120,000 Marketable securities 0 300,000 Accounts receivable, net 2,380,000 1,480,000 Inventory 3,520,000 2,200,000 Prepaid expenses 240,000 180,000 Total current assets 7,020,000 5,280,000 Plant and equipment, net 9,360,000 8,970,000 Total assets $ 16,380,000 $ 14,250,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,930,000 $ 2,820,000 Note payable, 10% 3,620,000 3,020,000 Total liabilities 7,550,000 5,840,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 1,330,000 910,000 Total stockholders' equity 8,830,000 8,410,000 Total liabilities and stockholders' equity $ 16,380,000 $ 14,250,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,780,000 $ 12,780,000 Cost of goods sold 12,624,000 9,585,000 Gross margin 3,156,000 3,195,000 Selling and administrative expenses 1,794,000 1,572,000 Net operating income 1,362,000 1,623,000 Interest expense 362,000 302,000 Net income before taxes 1,000,000 1,321,000 Income taxes (30%) 300,000 396,300 Net income 700,000 924,700 Common dividends 280,000 462,350 Net income retained 420,000 462,350 Beginning retained earnings 910,000 447,650 Ending retained earnings $ 1,330,000 $ 910,000 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 1.0 Average collection period 30 days Average sale period 60 days Return on assets 8.4 % 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: Working capital. The current ratio. (Round your final answers to 2 decimal places.) The acid-test ratio. (Round your final answers to 2 decimal places.) The average collection period. (The accounts receivable at the beginning of last year totaled $1,590,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.) The average sale period. (The inventory at the beginning of last year totaled $1,950,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.) The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.) The total asset turnover. (The total assets at the beginning of last year totaled $14,530,000.) (Round your final answers to 2 decimal places.)

Explanation / Answer

1 Working capital = Current asset - current liabilities This year Last year Current assets 7020000 5280000 Current liabilities 3930000 2820000 Working capital 3090000 2460000 2 Current ratio = Current assets / current Liabilities Current assets 7020000 5280000 Current liabilities 3930000 2820000 Current ratio 1.8 1.9 3 Acid test ratio = (current assets - inventory )/ current liabilities Acid test (7020000-3520000-240000) 3260000 2900000 Current liabilities 3930000 2820000 Acid test ratio 0.8 1.0 4 Receivable turnover = Net sales / Average accounts receivable Net sales   15780000 12780000 Beginning accounts receivable 1480000 1590000 Ending accounts receivable 2380000 1480000 Average accounts receivable 1930000 1535000 Average accounts receivable = (Beginning + ending )/2 Receivable turnover 8.18 8.33 5 Days sales uncollected = 365 / accounts receivable tunover Days sales uncollected 44.64 43.84 Days 6 Inventory turnover = Cost of goods sold / Average inventory Cost of goods sold 12624000 9585000 Beginning inventory 2200000 1950000 Ending inventory 3520000 2200000 Average inventory 2860000 2075000 Average inventory = (Beginning + Ending )/2 Inventory turnover 4.41 4.62 7 Days sale in inventory = 365 / inventory turnover Days sales in inventory 82.69 79.02 Days 8 Operating cycle = Days sales uncollected + days sales in inventory Days sales uncollected 44.64 43.84 Days sales in inventory 82.69 79.02 Operating cycle 127.33 122.86 9 Assets turnover ratio = Net sales / average total assets Net sales 15780000 12780000 Beginning total assets 14250000 14530000 Ending total assets 16380000 14250000 Average total assets 15315000 14390000 Assets turnover ratio 1.03 0.89

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