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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

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.)

This Year

Last Year

a.

Working capital

b.

The current ratio

c.

The acid-test ratio

d.

The average collection period

days

days

e.

The average sale period

days

days

f.

The operating cycle

days

days

g.

The total asset turnover

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