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 $ 910,000 $ 1,150,000 Marketable securities 0 300,000 Accounts receivable, net 2,500,000 1,600,000 Inventory 3,550,000 2,000,000 Prepaid expenses 250,000 190,000 Total current assets 7,210,000 5,240,000 Plant and equipment, net 9,420,000 9,000,000 Total assets $ 16,630,000 $ 14,240,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,960,000 $ 2,880,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,600,000 5,920,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,030,000 1,320,000 Total stockholders' equity 9,030,000 8,320,000 Total liabilities and stockholders' equity $ 16,630,000 $ 14,240,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,810,000 $ 13,080,000 Cost of goods sold 12,648,000 9,810,000 Gross margin 3,162,000 3,270,000 Selling and administrative expenses 1,298,000 1,584,000 Net operating income 1,864,000 1,686,000 Interest expense 364,000 304,000 Net income before taxes 1,500,000 1,382,000 Income taxes (30%) 450,000 414,600 Net income 1,050,000 967,400 Common dividends 340,000 483,700 Net income retained 710,000 483,700 Beginning retained earnings 1,320,000 836,300 Ending retained earnings $ 2,030,000 $ 1,320,000 . 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 $1,620,000.) e. The average sale period. (The inventory at the beginning of last year totaled $1,980,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year totaled $13,020,000.)

Explanation / Answer

(a) Computation of the net working capital.We have,

Net working capital = Current Asset - Current liabilities

(b) Computation of the current ratio.We have,

Current ratio= Current Asset / Current Liabilities

(c) Computation of the acid-test ratio.We have,

Acid-test ratio = ( Current asset - inventory - Prepaid expenses) / Current liabilities

(d) Computation of the average collection period.We have,

Step1: Computation of the debtor turnover ratio.

Debtor turnover ratio = Credit sales / Average debtor

Step2: Computation of the Average collection period.We have,

Average collection period = Month in a year / Debtor turnover ratio

(e) Computation of the average sales period.We have,

Step1: Computation of the inventory turnover ratio.We have,

Inventory turnover ratio = Cost of good sold / Average inventory

Step2: Computation of the average sales period.We have,

Average sales period = 12 month / Inventory turnover ratio

(f) Computation of the operating cycle.We have,

Operating Cycle = Months sales of Inventory + Months sales Outstanding

Current year operating cycle = 2.63 + 1.56 = 4.19 months

Last year operating cycle = 2.43 +1.48 = 3.91 months

(g) Computation of the total asset turnover.We have,

Total asset turnover = Cost of good sold / Average total asset

Year Working capital Current year 7,210,000 - 3,960,000 $ 3,250,000 Last year 5,240,000 - 2,880,000 $ 2,360,000

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