You have just been hired as a financial analyst for Lydex Company, a manufacture

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 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:

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

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 $1,630,000.) (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 $1,990,000.) (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 $14,570,000.) (Round your final answers to 2 decimal places.)

Lydex Company
Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 920,000 $ 1,160,000 Marketable securities 0 300,000 Accounts receivable, net 2,540,000 1,640,000 Inventory 3,560,000 2,100,000 Prepaid expenses 250,000 190,000 Total current assets 7,270,000 5,390,000 Plant and equipment, net 9,440,000 9,010,000 Total assets $ 16,710,000 $ 14,400,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,970,000 $ 2,900,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,610,000 5,940,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 1,600,000 960,000 Total stockholders' equity 9,100,000 8,460,000 Total liabilities and stockholders' equity $ 16,710,000 $ 14,400,000

Explanation / Answer

Answer 3 Part a:

This Year:

Working Capital = Current Asset – Current Liabilities
Working Capital = $7,270,000 - $3,970,000
Working Capital = $3,300,000

Last Year:

Working Capital = Current Asset – Current Liabilities
Working Capital = $5,390,000 - $2,900,000
Working Capital = $2,490,000

Answer of 3 part b:

This Year:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $7,270,000 / $3,970,000
Current Ratio = 1.83:1

Last Year:

Current ratio = Current Assets / Current Liabilities
Current Ratio = $5,390,000 / $2,900,000
Current Ratio = 1.86:1

Answer of 3 Part C:

This Year:

Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities
Acid Test Ratio = ($7,270,000 - $3,560,000) / $3,970,000
Acid Test Ratio = $3,710,000 / $3,970,000
Acid Test Ratio = 0.93:1

Last Year:

Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities
Acid Test Ratio = ($5,390,000 - $2,100,000) / $2,900,000
Acid Test Ratio = $3,290,000/ $2,900,000
Acid Test Ratio = 1.13:1

Answer of 3 Part d;

This Year:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Average Accounts Receivable = ($1,640,000 + $2,540,000) /2
Average Accounts Receivable = $2,090,000

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $15,820,000 / $2,090,000
Accounts Receivable Turnover = 7.57 times

Average Collection Period = 365 days / Accounts Receivable Turnover
Average Collection Period = 365 / 7.57
Average Collection Period = 48 days

Last Year:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Average Accounts Receivable = ($1,630,000 + $1,640,000) /2
Average Accounts Receivable = $1,635,000

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $15,820,000/ $1,635,000
Accounts Receivable Turnover = 9.68 times

Average Collection Period = 365 days / Accounts Receivable Turnover
Average Collection Period = 365 / 9.68
Average Collection Period = 38 days

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