Required information [ The following information applies to the questions displa

Question

Required information

[The following information applies to the questions displayed below.]

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 $1,720,000.) (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 $2,080,000.) (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 $14,660,000.) (Round your final answers to 2 decimal places.)

Lydex Company
Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 1,010,000 $ 1,250,000 Marketable securities 0 300,000 Accounts receivable, net 2,900,000 2,000,000 Inventory 3,650,000 2,000,000 Prepaid expenses 270,000 210,000 Total current assets 7,830,000 5,760,000 Plant and equipment, net 9,620,000 9,100,000 Total assets $ 17,450,000 $ 14,860,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,060,000 $ 3,080,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,760,000 6,180,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,690,000 1,680,000 Total stockholders' equity 9,690,000 8,680,000 Total liabilities and stockholders' equity $ 17,450,000 $ 14,860,000

Explanation / Answer

a: Working capital:

This year

Last year

Total current assets

7830000

5760000

Less: Total current liabilities

4060000

3080000

Working capital

3770000

2680000

Working capital has increased significantly in this year compare to the working capital of last year thus, the ability of the company to expand its operations has certainly improved in this year.   

b: Current ratio:

This year

Last year

Current assets

Cash

1010000

1250000

Marketable securities

0

300000

Accounts receivable, net

2900000

2000000

Inventory

3650000

2000000

Prepaid expenses

270000

210000

(A): Total current assets

7830000

5760000

(B): Total current liabilities

4060000

3080000

Current ratio (A/B)

(7830000 / 4060000)

1.93

(5760000 / 3080000)              

1.87

The current ratio of this year is 1.93 is better than the previous year of 1.87 hence, it shows that the liquidity position of the company in this year has improved.

C: Acid test ratio:

This year

Last year

Current assets

Cash

1010000

1250000

Marketable securities

0

300000

Accounts receivable, net

2900000

2000000

Inventory

3650000

2000000

Prepaid expenses

270000

210000

Total current assets

7830000

5760000

Less: Inventories

3650000

2000000

(A): Current assets less inventories

4180000

3760000

(B): Total current liabilities

4060000

3080000

Acid test ratio (A/B)

(4180000 / 4060000)

1.03

(3760000 / 3080000)

1.22

However, the acid test ratio of the company has deteriorated a bit which indicate that the ability of the company to liquidate its inventory has deteriorated a bit compare to the previous year.

d: The average collection period:

This year

Last year

Average receivable:

Opening accounts receivable

2000000

1720000

Add: Closing accounts receivable

2900000

2000000

Aggregate receivables

4900000

3720000

Average receivable:

(4900000 / 2)

2450000

(3720000/2)

1860000

Sales

15910000

14080000

The average collection period (In days)

(2450000 x 365 / 15910000)

56.21

(18600000 x 365/14080000)

48.22

e: Average sale period:

This year

Last year

Average inventory:

Opening inventory

2000000

2080000

Add: Closing inventory

3650000

2000000

Aggregate of opening and closing inventory

5650000

4080000

Average inventory:

(5650000 / 2)

2825000

(4080000 / 2)

2040000

Sales

15910000

14080000

Average sale period (In days)

(2825000 x 365/15910000)

64.81

(2040000 x 365/14080000)

52.88

f: Operating cycle:

This year

Last year

Average sales period

64.81 days

52.88 days

Add: Average collection period

56.21 days

48.22 days

Operating cycle (IN days)

121.02

101.1

g: The total asset turnover ratio:

This year

Last year

Opening total assets

14860000

14660000

Add: Closing total assets

17450000

14860000

Aggregate of total assets

32310000

29520000

Average total assets

(32310000/ 2)

16155000

(29520000/2)

14760000

Sales

15910000

14080000

Total asset turnover ratio

(15910000/16155000)

0.98

(14080000/14760000)

0.95

The above ratios clearly indicate that the operating efficiency of the company have improved in this year as all the operating ratios have improved in this year compare to the operating ratios of last year.

a: Working capital:

This year

Last year

Total current assets

7830000

5760000

Less: Total current liabilities

4060000

3080000

Working capital

3770000

2680000

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