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Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6]

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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
	This Year		Last Year
Assets
Current assets:
Cash	$	870,000	$	1,110,000
Marketable securities		0		300,000
Accounts receivable, net		2,340,000		1,440,000
Inventory		3,510,000		2,100,000
Prepaid expenses		240,000		180,000
Total current assets		6,960,000		5,130,000
Plant and equipment, net		9,340,000		8,960,000
Total assets	$	16,300,000	$	14,090,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,920,000	$	2,800,000
Note payable, 10%		3,600,000		3,000,000
Total liabilities		7,520,000		5,800,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		1,780,000		1,290,000
Total stockholders' equity		8,780,000		8,290,000
Total liabilities and stockholders' equity	$	16,300,000	$	14,090,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,770,000	$	12,680,000
Cost of goods sold		12,616,000		9,510,000
Gross margin		3,154,000		3,170,000
Selling and administrative expenses		1,594,000		1,568,000
Net operating income		1,560,000		1,602,000
Interest expense		360,000		300,000
Net income before taxes		1,200,000		1,302,000
Income taxes (30%)		360,000		390,600
Net income		840,000		911,400
Common dividends		350,000		455,700
Net income retained		490,000		455,700
Beginning retained earnings		1,290,000		834,300
Ending retained earnings	$	1,780,000	$	1,290,000

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

Current ratio	2.3
Acid-test ratio	1.0
Average collection period	30	days
Average sale period	60	days
Return on assets	8.3	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
Price-earnings ratio	10

rev: 04_27_2020_QC_CS-209476

Problem 14-15 Part 3

3. You decide, finally, to assess the company’s 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 $1,580,000.) (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 $1,940,000.) (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 $12,980,000.) (Round your final answers to 2 decimal places.)

Answer 1

a. Working Capital

Working Capital = Current Assets - Current Liabilities

Particulars	This Year	Last Year
Current Assets	$6,960,000	$5,130,000
Less: Current Liabilities	$3,920,000	$2,800,000
Working Capital	$3,040,000	$2,330,000

b. Current Ratio

Current Ratio = Current Assets / Current Liabilities

Particulars	This Year	Last Year
Current Assets	$6,960,000	$5,130,000
/ Current Liabilities	$3,920,000	$2,800,000
Current Ratio	1.78 : 1	1.83 : 1

c. Acid-test ratio

Acid Test Ratio = Quick Assets / Current Liabilities Quick Assets = Current Assets - Inventory - Prepaid expenses

Particulars	This Year	Last Year
Current Assets	$6,960,000	$5,130,000
Less: Inventory	$3,510,000	$2,100,000
Less: Prepaid expenses	$240,000	$180,000
Quick Assets	$3,210,000	$2,850,000
/ Current Liabilities	$3,920,000	$2,800,000
Acid Test Ratio	0.82 : 1	1.02 : 1

d. Average collection period

Average collection period = 365 days / Credit Sales * Average accounts receivable

This Year

Average accounts receivable = ($1,440,000 + $2,340,000) / 2 = $1,890,000

Average collection period = 365 days / $15,770,000 * $1,890,000 = 43.74 days

Last Year

Average accounts receivable = ($1,580,000 + $1,440,000) / 2 = $1,510,000

Average collection period = 365 days / $12,680,000 * $1,510,000 = 43.47 days

e. Average sale period

Average sale period = 365 days / Cost of goods sold * Average Inventories

This Year

Average Inventories = ($2,100,000 + $3,510,000) / 2 = $2,805,000

Average sale period = 365 days / $12,616,000 * $2,805,000 = 81.15 days

Last Year

Average Inventories = ($1,940,000 + $2,100,000) / 2 = $2,020,000

Average sale period = 365 days / $9,510,000 * $2,020,000 = 77.53 days

f. Operating Cycle

Operating cycle = Average collection period + Average sale period

This Year

Operating Cycle = 43.74 days + 81.15 days = 124.89 days

Last Year

Operating Cycle = 43.47 days + 77.53 days = 121.00 days

g. Total asset turnover

Asset turnover = Credit Sales / Average total assets

This Year

Average total assets = ($14,090,000 + $16,300,000) / 2 = $15,195,000

Asset Turnover = $15,770,000 / $15,195,000 = 1.04 times

Last Year

Average total assets = ($12,980,000 + $14,090,000) / 2 = $13,535,000

Asset Turnover = $12,680,000 / $13,535,000 = 0.94 times

All the best...