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 $ 870,000 $ 1,110,000 Marketable securities 0 300,000 Accounts receivable, net 2,340,000 1,440,000 Inventory 3,510,000 2,100,000 Prepaid expenses 240,000 180,000 Total current assets 6,960,000 5,130,000 Plant and equipment, net 9,340,000 8,960,000 Total assets $ 16,300,000 $ 14,090,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,920,000 $ 2,800,000 Note payable, 10% 3,600,000 3,000,000 Total liabilities 7,520,000 5,800,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 1,780,000 1,290,000 Total stockholders' equity 8,780,000 8,290,000 Total liabilities and stockholders' equity $ 16,300,000 $ 14,090,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,770,000 $ 12,680,000 Cost of goods sold 12,616,000 9,510,000 Gross margin 3,154,000 3,170,000 Selling and administrative expenses 1,594,000 1,568,000 Net operating income 1,560,000 1,602,000 Interest expense 360,000 300,000 Net income before taxes 1,200,000 1,302,000 Income taxes (30%) 360,000 390,600 Net income 840,000 911,400 Common dividends 350,000 455,700 Net income retained 490,000 455,700 Beginning retained earnings 1,290,000 834,300 Ending retained earnings $ 1,780,000 $ 1,290,000 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 30 days Average sale period 60 days Return on assets 8.3% Debt-to-equity ratio 0.7 Times interest earned ratio 5.9 Price-earnings ratio 10 rev: 04_27_2020_QC_CS-209476 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 a. The times interest earned ratio. b. The debt-to-equity ratio. c. The gross margin percentage.

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 $ 870,000 $ 1,110,000 Marketable securities 0 300,000 Accounts receivable, net 2,340,000 1,440,000 Inventory 3,510,000 2,100,000 Prepaid expenses 240,000 180,000 Total current assets 6,960,000 5,130,000 Plant and equipment, net 9,340,000 8,960,000 Total assets $ 16,300,000 $ 14,090,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,920,000 $ 2,800,000 Note payable, 10% 3,600,000 3,000,000 Total liabilities 7,520,000 5,800,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 1,780,000 1,290,000 Total stockholders' equity 8,780,000 8,290,000 Total liabilities and stockholders' equity $ 16,300,000 $ 14,090,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,770,000 $ 12,680,000 Cost of goods sold 12,616,000 9,510,000 Gross margin 3,154,000 3,170,000 Selling and administrative expenses 1,594,000 1,568,000 Net operating income 1,560,000 1,602,000 Interest expense 360,000 300,000 Net income before taxes 1,200,000 1,302,000 Income taxes (30%) 360,000 390,600 Net income 840,000 911,400 Common dividends 350,000 455,700 Net income retained 490,000 455,700 Beginning retained earnings 1,290,000 834,300 Ending retained earnings $ 1,780,000 $ 1,290,000 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 30 days Average sale period 60 days Return on assets 8.3% Debt-to-equity ratio 0.7 Times interest earned ratio 5.9 Price-earnings ratio 10 rev: 04_27_2020_QC_CS-209476 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 a. The times interest earned ratio. b. The debt-to-equity ratio. c. The gross margin percentage.

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 63P: Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture...

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Question

	This Year	Last Year
Lydex Company Comparative Balance Sheet
Assets
Current assets:
Cash	$ 870,000	$ 1,110,000
Marketable securities	0	300,000
Accounts receivable, net	2,340,000	1,440,000
Inventory	3,510,000	2,100,000
Prepaid expenses	240,000	180,000
Total current assets	6,960,000	5,130,000
Plant and equipment, net	9,340,000	8,960,000
Total assets	$ 16,300,000	$ 14,090,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 3,920,000	$ 2,800,000
Note payable, 10%	3,600,000	3,000,000
Total liabilities	7,520,000	5,800,000
Stockholders' equity:
Common stock, $70 par value	7,000,000	7,000,000
Retained earnings	1,780,000	1,290,000
Total stockholders' equity	8,780,000	8,290,000
Total liabilities and stockholders' equity	$ 16,300,000	$ 14,090,000

	This Year	Last Year
Lydex Company Comparative Income Statement and Reconciliation
Sales (all on account)	$ 15,770,000	$ 12,680,000
Cost of goods sold	12,616,000	9,510,000
Gross margin	3,154,000	3,170,000
Selling and administrative expenses	1,594,000	1,568,000
Net operating income	1,560,000	1,602,000
Interest expense	360,000	300,000
Net income before taxes	1,200,000	1,302,000
Income taxes (30%)	360,000	390,600
Net income	840,000	911,400
Common dividends	350,000	455,700
Net income retained	490,000	455,700
Beginning retained earnings	1,290,000	834,300
Ending retained earnings	$ 1,780,000	$ 1,290,000

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	30	days
Average sale period	60	days
Return on assets	8.3%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
Price-earnings ratio	10

rev: 04_27_2020_QC_CS-209476

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

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 $12,980,000.)

e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,834,300. 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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