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
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 |
|
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 answers 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 answers to 2 decimal place.)
f. The operating cycle. (Round your intermediate calculations and final answers to 2 decimal place.)
g. The total asset turnover. (The total assets at the beginning of last year totaled $13,000,000.) (Round your final answers to 2 decimal places.)
| |||||||||||||||||||||||||||||||||||||||||||||||||
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started