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ACC 113 Lecture Notes - Lecture 20: Accounts Receivable, Startup Company, No Down Payment

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tealmammoth179
25 Jul 2020
School
Tunxis Community College
Department
Accounting
Course
ACC 113
Professor
Muccino

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Document Summary

Establish a payment period 15 days vs. 45 days. Monitor collections should prepare ageing schedules to see when to expect cash flows and to spot any issues that may arise. Concentration of risk the threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company. Accounts receivable turnover measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable net credit sales/average net accounts receivable. Average collection period the average amount of time that a receivable is outstanding 365/accounts receivable turnover. Resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers declines over useful life. Important to keep assets in good condition, replace worn-out assets, and. Revenue expenditures expand productive assets as needed. Expenditures that are immediately charged against revenues as an expense.

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Related Questions

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 company’s financialstatements, including comparing Lydex’s performance to its majorcompetitors. The company’s 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 Company’sindustry:

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 company’s 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.)

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 $ 1,000,000 $ 1,240,000
Marketable securities 0 300,000
Accounts receivable, net 2,860,000 1,960,000
Inventory 3,640,000 2,400,000
Prepaid expenses 270,000 210,000
Total current assets 7,770,000 6,110,000
Plant and equipment, net 9,600,000 9,090,000
Total assets $ 17,370,000 $ 15,200,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 4,050,000 $ 3,060,000
Note payable, 10% 3,700,000 3,100,000
Total liabilities 7,750,000 6,160,000
Stockholders' equity:
Common stock, $75 par value 7,500,000 7,500,000
Retained earnings 2,120,000 1,540,000
Total stockholders' equity 9,620,000 9,040,000
Total liabilities and stockholders' equity $ 17,370,000 $ 15,200,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,900,000 $ 13,980,000
Cost of goods sold 12,720,000 10,485,000
Gross margin 3,180,000 3,495,000
Selling and administrative expenses 1,410,000 1,620,000
Net operating income 1,770,000 1,875,000
Interest expense 370,000 310,000
Net income before taxes 1,400,000 1,565,000
Income taxes (30%) 420,000 469,500
Net income 980,000 1,095,500
Common dividends 400,000 547,750
Net income retained 580,000 547,750
Beginning retained earnings 1,540,000 992,250
Ending retained earnings $ 2,120,000 $ 1,540,000

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 9.7 %
Debt-to-equity ratio .65
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 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 $13,110,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,492,250. There has been no change in common stock over the last two years.)

f. Is the company’s financial leverage positive or negative?

2.

You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $102 per share and that at the end of last year it was $70. For both this year and last year, compute: (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 earnings per share.
b. The dividend yield ratio.
c. The dividend payout ratio.
d. The price-earnings ratio.
e.

The book value per share of common stock.

3.

You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers to 2 decimal places.)
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 $1,710,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $2,070,000.)
f. The operating cycle.
g. The total asset turnover. (The total assets at the beginning of last year totaled $14,650,000.)

Problem 13-15A Comprehensive Ratio Analysis [LO13-2, LO13-3, LO13-4, LO13-5, LO13-6]

[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 $ 950,000 $ 1,190,000
Marketable securities 0 300,000
Accounts receivable, net 2,660,000 1,760,000
Inventory 3,590,000 2,400,000
Prepaid expenses 260,000 200,000
Total current assets 7,460,000 5,850,000
Plant and equipment, net 9,500,000 9,040,000
Total assets $ 16,960,000 $ 14,890,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 4,000,000 $ 2,960,000
Note payable, 10% 3,660,000 3,060,000
Total liabilities 7,660,000 6,020,000
Stockholders' equity:
Common stock, $70 par value 7,000,000 7,000,000
Retained earnings 2,300,000 1,870,000
Total stockholders' equity 9,300,000 8,870,000
Total liabilities and stockholders' equity $ 16,960,000 $ 14,890,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,850,000 $ 13,480,000
Cost of goods sold 12,680,000 10,110,000
Gross margin 3,170,000 3,370,000
Selling and administrative expenses 1,704,000 1,600,000
Net operating income 1,466,000 1,770,000
Interest expense 366,000 306,000
Net income before taxes 1,100,000 1,464,000
Income taxes (30%) 330,000 439,200
Net income 770,000 1,024,800
Common dividends 340,000 512,400
Net income retained 430,000 512,400
Beginning retained earnings 1,870,000 1,357,600
Ending retained earnings $ 2,300,000 $ 1,870,000

To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Current ratio 2.4
Acid-test ratio 1.1
Average collection period 40 days
Average sale period 60 days
Return on assets 9.2 %
Debt-to-equity ratio .65
Times interest earned ratio 5.8
Price-earnings ratio 10

Part 1

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 $13,060,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,357,600. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
This Year Last Year
A.
B.
C. % %
D. % %
E. % %
F.

Part 2

2.

You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $92 per share and that at the end of last year it was $60. For both this year and last year, compute: (Round your intermediate calculations and final answers to 2 decimal places. For percentages 0.1234 should be considered as 12.34%.)

a. The earnings per share.
b. The dividend yield ratio.
c. The dividend payout ratio.
d. The price-earnings ratio.
e. The book value per share of common stock.
ThisYear Last Year
A.
B. % %
C. % %
D.
E.

Part 3

3.

You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers to 2 decimal places.)
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 $1,660,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $2,020,000.)
f. The operating cycle.
g.

The total asset turnover. (The total assets at the beginning of last year totaled $13,060,000.)

This Year Last Year
A.
B.
C.
D. days days
E. days days
F. days days
G.