Lydex 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 $ 1,020,000 $ 1,260,000 Marketable securities 0 300,000 Accounts receivable, net 2,940,000 2,040,000 Inventory 3,660,000 2,100,000 Prepaid expenses 270,000 210,000 Total current assets 7,890,000 5,910,000 Plant and equipment, net 9,640,000 9,110,000 Total assets $ 17,530,000 $ 15,020,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,070,000 $ 3,100,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,770,000 6,200,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 2,260,000 1,320,000 Total stockholders' equity 9,760,000 8,820,000 Total liabilities and stockholders' equity $ 17,530,000 $ 15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,920,000 $ 14,180,000 Cost of goods sold 12,736,000 10,635,000 Gross margin 3,184,000 3,545,000 Selling and administrative expenses 1,014,000 1,628,000 Net operating income 2,170,000 1,917,000 Interest expense 370,000 310,000 Net income before taxes 1,800,000 1,607,000 Income taxes (30%) 540,000 482,100 Net income 1,260,000 1,124,900 Common dividends 320,000 562,450 Net income retained 940,000 562,450 Beginning retained earnings 1,320,000 757,550 Ending retained earnings $ 2,260,000 $ 1,320,000 The following financial data and ratios 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 9.9% Debt-to-equity ratio 0.7 Times interest earned ratio 5.9 Price-earnings ratio 10 To assess the company’s performance in terms of debt management and profitability, compute the following for this year and last year: The times interest earned ratio. The debt-to-equity ratio. The gross margin percentage. The return on total assets. (Total assets at the beginning of last year were $13,130,000.) The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.) Is the company’s financial leverage positive or negative?

Lydex 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 $ 1,020,000 $ 1,260,000 Marketable securities 0 300,000 Accounts receivable, net 2,940,000 2,040,000 Inventory 3,660,000 2,100,000 Prepaid expenses 270,000 210,000 Total current assets 7,890,000 5,910,000 Plant and equipment, net 9,640,000 9,110,000 Total assets $ 17,530,000 $ 15,020,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,070,000 $ 3,100,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,770,000 6,200,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 2,260,000 1,320,000 Total stockholders' equity 9,760,000 8,820,000 Total liabilities and stockholders' equity $ 17,530,000 $ 15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,920,000 $ 14,180,000 Cost of goods sold 12,736,000 10,635,000 Gross margin 3,184,000 3,545,000 Selling and administrative expenses 1,014,000 1,628,000 Net operating income 2,170,000 1,917,000 Interest expense 370,000 310,000 Net income before taxes 1,800,000 1,607,000 Income taxes (30%) 540,000 482,100 Net income 1,260,000 1,124,900 Common dividends 320,000 562,450 Net income retained 940,000 562,450 Beginning retained earnings 1,320,000 757,550 Ending retained earnings $ 2,260,000 $ 1,320,000 The following financial data and ratios 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 9.9% Debt-to-equity ratio 0.7 Times interest earned ratio 5.9 Price-earnings ratio 10 To assess the company’s performance in terms of debt management and profitability, compute the following for this year and last year: The times interest earned ratio. The debt-to-equity ratio. The gross margin percentage. The return on total assets. (Total assets at the beginning of last year were $13,130,000.) The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.) Is the company’s financial leverage positive or negative?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter16: Financial Statement Analysis

Section: Chapter Questions

Problem 4PB

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Question

Lydex Company’s financial statements for the last two years are as follows:

	This Year	Last Year
Lydex Company
Comparative Balance Sheet
Assets
Current assets:
Cash	$ 1,020,000	$ 1,260,000
Marketable securities	0	300,000
Accounts receivable, net	2,940,000	2,040,000
Inventory	3,660,000	2,100,000
Prepaid expenses	270,000	210,000
Total current assets	7,890,000	5,910,000
Plant and equipment, net	9,640,000	9,110,000
Total assets	$ 17,530,000	$ 15,020,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 4,070,000	$ 3,100,000
Note payable, 10%	3,700,000	3,100,000
Total liabilities	7,770,000	6,200,000
Stockholders' equity:
Common stock, $75 par value	7,500,000	7,500,000
Retained earnings	2,260,000	1,320,000
Total stockholders' equity	9,760,000	8,820,000
Total liabilities and stockholders' equity	$ 17,530,000	$ 15,020,000

	This Year	Last Year
Lydex Company
Comparative Income Statement and Reconciliation
Sales (all on account)	$ 15,920,000	$ 14,180,000
Cost of goods sold	12,736,000	10,635,000
Gross margin	3,184,000	3,545,000
Selling and administrative expenses	1,014,000	1,628,000
Net operating income	2,170,000	1,917,000
Interest expense	370,000	310,000
Net income before taxes	1,800,000	1,607,000
Income taxes (30%)	540,000	482,100
Net income	1,260,000	1,124,900
Common dividends	320,000	562,450
Net income retained	940,000	562,450
Beginning retained earnings	1,320,000	757,550
Ending retained earnings	$ 2,260,000	$ 1,320,000

The following financial data and ratios 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	9.9%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
Price-earnings ratio	10

To assess the company’s performance in terms of debt management and profitability, compute the following for this year and last year:

The times interest earned ratio.
The debt-to-equity ratio.
The gross margin percentage.
The return on total assets. (Total assets at the beginning of last year were $13,130,000.)
The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.)
Is the company’s financial leverage positive or negative?

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