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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

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 companys financial statements, including comparing Lydexs performance to its major competitors. The companys financial statements for the last two years are as follows:

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

Lydex Company Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,790,000 $ 12,880,000
Cost of goods sold 12,632,000 9,660,000
Gross margin 3,158,000 3,220,000
Selling and administrative expenses 1,796,000 1,576,000
Net operating income 1,362,000 1,644,000
Interest expense 362,000 302,000
Net income before taxes 1,000,000 1,342,000
Income taxes (30%) 300,000 402,600
Net income 700,000 939,400
Common dividends 350,000 469,700
Net income retained 350,000 469,700
Beginning retained earnings 1,550,000 1,080,300
Ending retained earnings $ 1,900,000 $ 1,550,000

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

Current ratio 2.3
Acid-test ratio 1.0
Average collection period 40 days
Average sale period 60 days
Return on assets 8.5 %
Debt-to-equity ratio 0.7
Times interest earned ratio 5.8
Price-earnings ratio 10

3. You decide, finally, to assess the companys 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.)

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