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 $ 910,000 $ 1,150,000 Marketable securities 0 300,000 Accounts receivable, net 2,500,000 1,600,000 Inventory 3,550,000 2,000,000 Prepaid expenses 250,000 190,000 Total current assets 7,210,000 5,240,000 Plant and equipment, net 9,420,000 9,000,000 Total assets $ 16,630,000 $ 14,240,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,960,000 $ 2,880,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,600,000 5,920,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,030,000 1,320,000 Total stockholders' equity 9,030,000 8,320,000 Total liabilities and stockholders' equity $ 16,630,000 $ 14,240,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,810,000 $ 13,080,000 Cost of goods sold 12,648,000 9,810,000 Gross margin 3,162,000 3,270,000 Selling and administrative expenses 1,298,000 1,584,000 Net operating income 1,864,000 1,686,000 Interest expense 364,000 304,000 Net income before taxes 1,500,000 1,382,000 Income taxes (30%) 450,000 414,600 Net income 1,050,000 967,400 Common dividends 340,000 483,700 Net income retained 710,000 483,700 Beginning retained earnings 1,320,000 836,300 Ending retained earnings $ 2,030,000 $ 1,320,000 To begin your assignment 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 1.0 Average collection period 40 days Average sale period 60 days Return on assets 8.7 % Debt-to-equity ratio 0.7 Times interest earned ratio 5.7 Price-earnings ratio 10 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 "Percentage" answers to 1 decimal place and other 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 $13,020,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,836,300. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?

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 $ 910,000 $ 1,150,000 Marketable securities 0 300,000 Accounts receivable, net 2,500,000 1,600,000 Inventory 3,550,000 2,000,000 Prepaid expenses 250,000 190,000 Total current assets 7,210,000 5,240,000 Plant and equipment, net 9,420,000 9,000,000 Total assets $ 16,630,000 $ 14,240,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,960,000 $ 2,880,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,600,000 5,920,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,030,000 1,320,000 Total stockholders' equity 9,030,000 8,320,000 Total liabilities and stockholders' equity $ 16,630,000 $ 14,240,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,810,000 $ 13,080,000 Cost of goods sold 12,648,000 9,810,000 Gross margin 3,162,000 3,270,000 Selling and administrative expenses 1,298,000 1,584,000 Net operating income 1,864,000 1,686,000 Interest expense 364,000 304,000 Net income before taxes 1,500,000 1,382,000 Income taxes (30%) 450,000 414,600 Net income 1,050,000 967,400 Common dividends 340,000 483,700 Net income retained 710,000 483,700 Beginning retained earnings 1,320,000 836,300 Ending retained earnings $ 2,030,000 $ 1,320,000 To begin your assignment 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 1.0 Average collection period 40 days Average sale period 60 days Return on assets 8.7 % Debt-to-equity ratio 0.7 Times interest earned ratio 5.7 Price-earnings ratio 10 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 "Percentage" answers to 1 decimal place and other 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 $13,020,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,836,300. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?

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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Question

Lydex Company Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$	910,000	$	1,150,000
Marketable securities		0		300,000
Accounts receivable, net		2,500,000		1,600,000
Inventory		3,550,000		2,000,000
Prepaid expenses		250,000		190,000
Total current assets		7,210,000		5,240,000
Plant and equipment, net		9,420,000		9,000,000
Total assets	$	16,630,000	$	14,240,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,960,000	$	2,880,000
Note payable, 10%		3,640,000		3,040,000
Total liabilities		7,600,000		5,920,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,030,000		1,320,000
Total stockholders' equity		9,030,000		8,320,000
Total liabilities and stockholders' equity	$	16,630,000	$	14,240,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales (all on account)	$	15,810,000	$	13,080,000
Cost of goods sold		12,648,000		9,810,000
Gross margin		3,162,000		3,270,000
Selling and administrative expenses		1,298,000		1,584,000
Net operating income		1,864,000		1,686,000
Interest expense		364,000		304,000
Net income before taxes		1,500,000		1,382,000
Income taxes (30%)		450,000		414,600
Net income		1,050,000		967,400
Common dividends		340,000		483,700
Net income retained		710,000		483,700
Beginning retained earnings		1,320,000		836,300
Ending retained earnings	$	2,030,000	$	1,320,000

To begin your assignment 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	1.0
Average collection period	40	days
Average sale period	60	days
Return on assets	8.7	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.7
Price-earnings ratio	10

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 "Percentage" answers to 1 decimal place and other 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 $13,020,000.)

e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,836,300. 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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