[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: Lydex CompanyComparative 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 Lydex CompanyComparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,910,000 $ 14,080,000 Cost of goods sold 12,728,000 10,560,000 Gross margin 3,182,000 3,520,000 Selling and administrative expenses 912,000 1,624,000 Net operating income 2,270,000 1,896,000 Interest expense 370,000 310,000 Net income before taxes 1,900,000 1,586,000 Income taxes (30%) 570,000 475,800 Net income 1,330,000 1,110,200 Common dividends 320,000 555,100 Net income retained 1,010,000 555,100 Beginning retained earnings 1,680,000 1,124,900 Ending retained earnings $ 2,690,000 $ 1,680,000 To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Current ratio 2.3 Acid-test ratio 1.1 Average collection period 32 days Average sale period 60 days Return on assets 9.8 % Debt-to-equity ratio .66 Times interest earned ratio 5.8 Price-earnings ratio 10 4. Required information Required: 1. You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.) a. The times interest earned ratio. b. The debt-to-equity ratio. c. The gross margin percentage. d. The return on total assets. (Total assets at the beginning of last year were $13,120,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,124,900. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?

[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: Lydex CompanyComparative 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 Lydex CompanyComparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,910,000 $ 14,080,000 Cost of goods sold 12,728,000 10,560,000 Gross margin 3,182,000 3,520,000 Selling and administrative expenses 912,000 1,624,000 Net operating income 2,270,000 1,896,000 Interest expense 370,000 310,000 Net income before taxes 1,900,000 1,586,000 Income taxes (30%) 570,000 475,800 Net income 1,330,000 1,110,200 Common dividends 320,000 555,100 Net income retained 1,010,000 555,100 Beginning retained earnings 1,680,000 1,124,900 Ending retained earnings $ 2,690,000 $ 1,680,000 To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Current ratio 2.3 Acid-test ratio 1.1 Average collection period 32 days Average sale period 60 days Return on assets 9.8 % Debt-to-equity ratio .66 Times interest earned ratio 5.8 Price-earnings ratio 10 4. Required information Required: 1. You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.) a. The times interest earned ratio. b. The debt-to-equity ratio. c. The gross margin percentage. d. The return on total assets. (Total assets at the beginning of last year were $13,120,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,124,900. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 60P

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[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:

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

Lydex Company Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales (all on account)	$	15,910,000	$	14,080,000
Cost of goods sold		12,728,000		10,560,000

Gross margin		3,182,000		3,520,000
Selling and administrative expenses		912,000		1,624,000

Net operating income		2,270,000		1,896,000
Interest expense		370,000		310,000

Net income before taxes		1,900,000		1,586,000
Income taxes (30%)		570,000		475,800

Net income		1,330,000		1,110,200
Common dividends		320,000		555,100

Net income retained		1,010,000		555,100
Beginning retained earnings		1,680,000		1,124,900

Ending retained earnings	$	2,690,000	$	1,680,000

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


Current ratio	2.3
Acid-test ratio	1.1
Average collection period	32	days
Average sale period	60	days
Return on assets	9.8	%
Debt-to-equity ratio	.66
Times interest earned ratio	5.8
Price-earnings ratio	10

Required information

Required:

You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

a.	The times interest earned ratio.
b.	The debt-to-equity ratio.
c.	The gross margin percentage.
d.	The return on total assets. (Total assets at the beginning of last year were $13,120,000.)
e.	The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,124,900. There has been no change in common stock over the last two years.)
f.	Is the company’s financial leverage positive or negative?

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