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

[The following information applies to the questionsdisplayed below.]

You have just been hired as a financial analyst for LydexCompany, a manufacturer of safety helmets. Your boss has asked youto perform a comprehensive analysis of the company’s financialstatements, including comparing Lydex’s performance to its majorcompetitors. The company’s financial statements for the last twoyears are as follows:

Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	1,020,000	$	1,260,000
Marketable securities		0		300,000
Accounts receivable, net		2,940,000		2,040,000
Inventory		3,660,000		2,100,000
Prepaid expenses		270,000		210,000
Total current assets		7,890,000		5,910,000
Plant and equipment, net		9,640,000		9,110,000
Total assets	$	17,530,000	$	15,020,000
Liabilities andStockholders' Equity
Liabilities:
Current liabilities	$	4,070,000	$	3,100,000
Note payable, 10%		3,700,000		3,100,000
Total liabilities		7,770,000		6,200,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,260,000		1,320,000
Total stockholders' equity		9,760,000		8,820,000
Total liabilities andstockholders' equity	$	17,530,000	$	15,020,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,920,000	$	14,180,000
Cost of goods sold		12,736,000		10,635,000
Gross margin		3,184,000		3,545,000
Selling and administrativeexpenses		1,014,000		1,628,000
Net operating income		2,170,000		1,917,000
Interest expense		370,000		310,000
Net income before taxes		1,800,000		1,607,000
Income taxes (30%)		540,000		482,100
Net income		1,260,000		1,124,900
Common dividends		320,000		562,450
Net income retained		940,000		562,450
Beginning retained earnings		1,320,000		757,550
Ending retained earnings	$	2,260,000	$	1,320,000

To begin your assignment you gather the following financial dataand ratios that are typical of companies in Lydex Company’sindustry:

Current ratio	2.3
Acid-test ratio	1.1
Average collection period	32	days
Average sale period	60	days
Return on assets	9.9	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
Price-earnings ratio	10

Problem 14-15 Part 3

3. You decide, finally, to assess the company’s liquidity andasset management. For both this year and last year, compute:

a. Working capital.

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

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

d. The average collection period. (The accounts receivable atthe beginning of last year totaled $1,730,000.) (Use 365days in a year. Round your intermediate calculations and finalanswers to 2 decimal place.)

e. The average sale period. (The inventory at the beginning oflast year totaled $2,090,000.) (Use 365 days in a year.Round your intermediate calculations and final answers to 2 decimalplace.)

f. The operating cycle. (Round your intermediatecalculations and final answers to 2 decimal place.)

g. The total asset turnover. (The total assets at the beginningof last year totaled $14,670,000.) (Round your finalanswers to 2 decimal places.)