To compute:
The following ratios for last year and this year −
Answer to Problem 15P
Solution:
Ratios | This year | Last year | |
a | Working capital | 39,00,000 | 31,80,000 |
b | Current Ratio | 2 | 2.15 |
c | Acid-test ratio | 0.94 | 1.22 |
d | Average collection period | 52.14 | 49.13 |
e | Average sale period | 91.25 | 79.69 |
f | Operating cycle | 143.39 | 128.82 |
g | Total asset turnover | 0.99 | 0.9 |
Explanation of Solution
The ratios are calculated as under −
For last year −
- Current assets = $ 5,940,000
- Current Liabilities = $ 2,760,000
For last year −
- Current assets = $ 5,940,000
- Current Liabilities = $ 2,760,000
For last year − Given,
- Cash = $ 1,260,000
- Marketable securities = $ 300,000
- Accounts receivables, net = $ 1,800,000
- Current liabilities = 2,760,000
For last year − Given,
- Sales on account = $ 12,480,000
- Accounts receivables, beginning = $ 1,560,000
- Accounts receivables, ending = $ 1,800,000
For last period − Given,
- Cost of goods sold = $ 9,900,000
- Inventory, Beginning = $ 1,920,000
- Inventory, Ending = $ 2,400,000
For last year − Given,
- Average sale period = 49.13 days
- Average collection period = 79.64 days
For last year − Given,
- Sales = $ 12,480,000
- Average total assets = $ 13,920,000
Thus, all the ratios have been calculated.
Requirement 4
To prepare:
A brief memo that summarizes how Lydex is performing relative to its competitors
Answer to Problem 15P
Solution:
The performance of Lydex can be explained as −
- The Lydex Company is doing fine in terms of current ratio and acid-test ratio but for sales period and collection period, it is far behind the industry averages.
- The return on total assets is also less when compared with the industry averages.
- Debt-to-equity ratio was appropriate till last year, but this year it deteriorated.
- The times-interest-earned ratio is also low as compared to industry averages
- Similarly, the price-earnings ratio is low when compared with industry’s price earnings ratio. Overall, the performance of the company is not up to to the mark as it should be as per the industry.
Explanation of Solution
The above answer can be explained as under −
The table is prepared to compare the ratios of the company for this year and last year −
Ratios | This year | Last year | Industry |
Current Ratio | 2 | 2.15 | 2.3 |
Acid-test ratio | 0.94 | 1.22 | 1.2 |
Average collection period | 52.14 | 49.13 | 30 days |
Average sale period | 91.25 | 79.69 | 60 days |
Return on total assets | 5.25% | 3.62% | 9.50% |
Debt-to-equity ratio | 0.78 | 0.63 | 0.65 |
Times interest earned ratio | 4.33 | 3.4 | 5.7 |
Price-earnings ratio | 8.57 | 7.94 | 10 |
Further it can be explained as −
- For the sales period, the average period is 30 days, while it is 52.14 days for this year and 49.13 days for last year. The collection period is very long for the company. The company should change its policies for the collections of accounts receivables.
- Similarly, for the sales period, it is far behind the industry averages.
- The return on total assets is also less when compared with the industry averages. The industry is earning more on total assets, while the company is again behind the industry averages. But from the last year to this year, it improved.
- Debt-to-equity ratio was appropriate till last year, but this year it deteriorated.
- The times-interest-earned ratio is also low as compared to industry averages. The industry is earning more to cover its interest obligations, when compared with the company.
- Similarly, the price-earnings ratio is low when compared with industry’s price-earnings ratio. The industry’s price-earnings ratio is 10, while for company it is low, but for this year it improved.
Thus, the brief memo for the performance of the company has been prepared.
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Chapter 14 Solutions
GEN COMBO LOOSELEAF INTRODUCTION TO MANAGERIAL ACCOUNTING; CONNECT AC
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