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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 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 |
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This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 1,020,000 | $ | 1,260,000 |
Marketable securities | 0 | 300,000 | ||
2,940,000 | 2,040,000 | |||
Inventory | 3,660,000 | 2,100,000 | ||
Prepaid expenses | 270,000 | 210,000 | ||
Total current assets | 7,890,000 | 5,910,000 | ||
Plant and equipment, net | 9,640,000 | 9,110,000 | ||
Total assets | $ | 17,530,000 | $ | 15,020,000 |
Liabilities and |
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Liabilities: | ||||
Current liabilities | $ | 4,070,000 | $ | 3,100,000 |
Note payable, 10% | 3,700,000 | 3,100,000 | ||
Total liabilities | 7,770,000 | 6,200,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
2,260,000 | 1,320,000 | |||
Total stockholders' equity | 9,760,000 | 8,820,000 | ||
Total liabilities and stockholders' equity | $ | 17,530,000 | $ | 15,020,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,920,000 | $ | 14,180,000 |
Cost of goods sold | 12,736,000 | 10,635,000 | ||
Gross margin | 3,184,000 | 3,545,000 | ||
Selling and administrative expenses | 1,014,000 | 1,628,000 | ||
Net operating income | 2,170,000 | 1,917,000 | ||
Interest expense | 370,000 | 310,000 | ||
Net income before taxes | 1,800,000 | 1,607,000 | ||
Income taxes (30%) | 540,000 | 482,100 | ||
Net income | 1,260,000 | 1,124,900 | ||
Common dividends | 320,000 | 562,450 | ||
Net income retained | 940,000 | 562,450 | ||
Beginning retained earnings | 1,320,000 | 757,550 | ||
Ending retained earnings | $ | 2,260,000 | $ | 1,320,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
2.3 | ||
Acid-test ratio | 1.1 | |
Average collection period | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.9 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
Price-earnings ratio | 10 | |
rev: 04_27_2020_QC_CS-209476
3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute:
a.
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 $1,730,000.) (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 $2,090,000.) (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 $13,130,000.) (Round your final answers to 2 decimal places.)
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