Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15
ID: 2391211 • Letter: P
Question
Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6]
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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 Income Statement and Reconciliation
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Problem 15-15 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 $1,630,000.) (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 CompanyComparative 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 a.
Working Capital = Current Assets - Current Liabilities
This Year:
Working Capital = $7,270,000 - $3,970,000
Working Capital = $3,300,000
Last Year:
Working Capital = $5,390,000 - $2,900,000
Working Capital = $2,490,000
Answer b.
Current Ratio = Current Assets / Current Liabilities
This Year:
Current Ratio = $7,270,000 / $3,970,000
Current Ratio = 1.83
Last Year:
Current Ratio = $5,390,000 / $2,900,000
Current Ratio = 1.86
Answer c.
Acid-test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
This Year:
Acid-test Ratio = ($7,270,000 - $3,560,000 - $250,000) / $3,970,000
Acid-test Ratio = 0.87
Last Year:
Acid-test Ratio = ($5,390,000 - $2,100,000 - $190,000) / $2,900,000
Acid-test Ratio = 1.07
Answer d
Average Collection Period = 365 * Average Accounts Receivable / Sales
This Year:
Average Accounts Receivable = ($2,540,000 + $1,640,000) / 2
Average Accounts Receivable = $2,090,000
Average Collection Period = 365 * $2,090,000 / $15,820,000
Average Collection Period = 48.22 days
Last Year:
Average Accounts Receivable = ($1,640,000 + $1,630,000) / 2
Average Accounts Receivable = $1,635,000
Average Collection Period = 365 * $1,635,000 / $13,180,000
Average Collection Period = 45.28 days