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.c. The acid-test ratio.d. The average collection period. (The accounts receivable at the beginning of last year totaled$1,560.000.) AssetsCurrent assets:CashMarketable securitiesAccounts receivable, netInventoryPrepaid expensesLydex CompanyComparative Balance SheetTotal current assetsPlant and equipment, netTotal assetsLiabilities and Stockholders' EquityLiabilities:Current liabilitiesNote payable, 10%Total liabilitiesStockholders' equity:Common stock, $78 par valueRetained earningsThis Year$ 960,000$ 1,260,000300,0002,700,0001,800,0003,900,0002,400,000240,000180,0007,800,000 5,940,0009,300,0008,940,000$17,100,000 $14,880,0000$ 3,900,0003,600,0007,500,000Last Year7,800,0001,800,000Total stockholders' equity9,600,000Total liabilities and stockholders' equity $17,100,000$ 2,760,0003,000,0005,760,0007,800,0001,320,0009,120,000$14,880,000 Lydex CompanyComparative Income Statement and ReconciliationSales (all on account)Cost of goods soldGross marginSelling and administrative expensesNet operating incomeInterest expenseNet income before taxesIncome taxes (30%)Net incomeCommon dividendsNet income retainedBeginning retained earningsEnding retained earningsThis Year Last Year$15,750,000 $12,480,00012,600,000 9,900,0003,150,000 2,580,0001,590,0001,560,0001,560,0001,020,000360,000300,0001,200,000720,000360,000216,000840,000504,000360,000252,000480,000252,0001,320,000 1,068,000$1,800,000 $1,320,000To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company'sindustry:Current ratioAcid-test ratioAverage collection periodAverage sale periodReturn on assetsDebt-to-equity ratioTimes interest earned ratioPrice-earnings ratio2.31.230 days60 days9.5%0.655.710

WORKING CAPITAL Working Capital is the Difference between Current Assets & Current Liabilities. Working Capital = Current Assets - Current Liabilities CURRENT RATIO Current Ratio ratio is an indicator of the firm’s commitment to meet its short-term liabilities. Current Ratio = Current Assets ÷ Current Liabilities ACID TEST RATIO Acid Test Ratio is also termed as Liqidity Ratio or Quick Ratio. The ratio is ascertained by comparing theliquid assets i.e., current assets (excluding stock and prepaid expenses) to current liabilities. Acid Test Ratio = Liquid Assets ÷ Current Liabilities AVERAGE COLLECTION PERIOD Debtors turnover ratio is used for computing the debt collection period. Average Collection Period = (Average Account Receivable ÷ Net Credit sales) * 365 DaysWorking Note #1 :- Computaion of Working Capital This Year Last Year A) Current Assets $7,800,000 $5,940,000 B) Current Liabilities $3,900,000 $2,760,000 Working Capital (A - B) $3,900,000 $3,180,000 Working Note #2 :- Computaion of Current ratio This Year Last Year A) Current Assets $7,800,000 $5,940,000 B) Current Liabilities $3,900,000 $2,760,000 Current Ratio (A ÷ B) 2 : 1 2.15 : 1 Working Note #3 :- Computaion of Acid Test Ratio This Year Last Year A) Liquid Assets Current Assets $7,800,000 $5,940,000 Less :- Inventory ($3,900,000) ($2,400,000) Less :- Prepaid Expenses ($240,000) ($180,000) Liquid Assets $3,660,000 $3,360,000 B) Current Liabilities $3,900,000 $2,760,000 Acid Test Ratio (A ÷ B) 0.94 : 1 1.22 : 1 Working Note #4 :- Computation of Average Collection Period. This Year Last Year A) Average Account Receivable B) Beggining Account Receivable $1,800,000 $1,560.000 C) Ending Account Receivable $2,700,000 $1,800,000 Average Account Receivable {(B + C) ÷ 2} $2,250,000 $1,680,000 D) Net Credit Sales $15,750,000 $12,480,000 Average Collection Period {(A ÷ D) * 365} 52 Days 49 Days REQUIREMENT# :- FINAL ANSWER This Year Current Year Working Capital $3,900,000 $3,180,000 Current Ratio 2 : 1 2.15 : 1 Acid Test Ratio 0.94 : 1 1.22 : 1 Average Collection Period 52 Days 49 Days

Business

Accounting

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. c. The acid-test ratio. d. The average collection period.

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. c. The acid-test ratio. d. The average collection period.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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