Accounting ACCT 2610 Lecture Notes - Lecture 20: Net Income, Bank Reconciliation, Retained Earnings
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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 companyรขยยs financialstatements, including comparing Lydexรขยยs performance to its majorcompetitors. The companyรขยยs financial statements for the last twoyears are as follows:
Lydex Company Comparative Balance Sheet | ||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 980,000 | $ | 1,220,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,780,000 | 1,880,000 | ||
Inventory | 3,620,000 | 2,200,000 | ||
Prepaid expenses | 260,000 | 200,000 | ||
Total current assets | 7,640,000 | 5,800,000 | ||
Plant and equipment, net | 9,560,000 | 9,070,000 | ||
Total assets | $ | 17,200,000 | $ | 14,870,000 |
Liabilities andStockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 4,030,000 | $ | 3,020,000 |
Note payable, 10% | 3,680,000 | 3,080,000 | ||
Total liabilities | 7,710,000 | 6,100,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,990,000 | 1,270,000 | ||
Total stockholders' equity | 9,490,000 | 8,770,000 | ||
Total liabilities andstockholders' equity | $ | 17,200,000 | $ | 14,870,000 |
Lydex Company Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,880,000 | $ | 13,780,000 |
Cost of goods sold | 12,704,000 | 10,335,000 | ||
Gross margin | 3,176,000 | 3,445,000 | ||
Selling and administrativeexpenses | 1,208,000 | 1,612,000 | ||
Net operating income | 1,968,000 | 1,833,000 | ||
Interest expense | 368,000 | 308,000 | ||
Net income before taxes | 1,600,000 | 1,525,000 | ||
Income taxes (30%) | 480,000 | 457,500 | ||
Net income | 1,120,000 | 1,067,500 | ||
Common dividends | 400,000 | 533,750 | ||
Net income retained | 720,000 | 533,750 | ||
Beginning retained earnings | 1,270,000 | 736,250 | ||
Ending retained earnings | $ | 1,990,000 | $ | 1,270,000 |
To begin your assignment you gather the following financial dataand ratios that are typical of companies in Lydex Companyรขยยsindustry:
Current ratio | 2.4 | |
Acid-test ratio | 1.1 | |
Average collection period | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.5 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.8 | |
Price-earnings ratio | 10 | |
3. You decide, finally, to assess the companyรขยยs 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 $1,690,000.) (Use 365days in a year. Round your intermediate calculations and finalanswer to 2 decimal place.) e. The average sale period. (The inventory at the beginning oflast year totaled $2,050,000.) (Use 365 days in a year.Round your intermediate calculations and final answer to 2 decimalplace.) f. The operating cycle. (Round your intermediatecalculations and final answer to 2 decimal place.) g. The total asset turnover. (The total assets at the beginningof last year totaled $14,630,000.) (Round your finalanswers to 2 decimal places.) |