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: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 $1,750,000.) (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 $2,110,000.) (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 $14,690,000.) (Round your final answers to 2 decimal places.)

Answer 1

Answer:

a. Working capital.

current assets - current liabilities

• current year = 7,800,000 - 3,900,000 = $3,900,000          
• last year = 5,940,000 - 2,760,000 = $3,180,000

b. The current ratio. (Round your final answers to 2 decimal places.)

• current year = 7,800,000 / 3,900,000 = 2          
• last year = 5,940,000 / 2,760,000 = 2.15

c. The acid-test ratio. (Round your final answers to 2 decimal places.)

• current year = (7,800,000 - 3,900,000) / 3,900,000 = 1          
• last year = (5,940,000 - 2,400,000) / 2,760,000 = 1.28

d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,750,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

turnover ratio = net sales / average accounts receivable

7

7.03

• current year = 365 / 7 = 52.14 days      
• last year = 365 / 7.03 = 51.92 days

e. The average sale period. (The inventory at the beginning of last year totaled $2,110,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)

• current year = {[(3,900,000 + 2,400,000) / 2] / $12,600,000} x 365 = 91.25 days
• last year =  {[(2,400,000 + $2,110,000) / 2] / $9,900,000} x 365 = 83.14 days

f. The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.)

• current year = 52.14 + 91.25 = 143.39 days      
• last year = 51.92 + 83.14 = 135.06 days

g. The total asset turnover. (The total assets at the beginning of last year totaled $14,690,000.) (Round your final answers to 2 decimal places.)

• current year = 15,750,000 / [(17,100,000 + 14,880,000)/2] = 0.98        
• last year = 12,480,000 / [(14,880,000 + 14,690,000)/2] = 0.84