Question

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 $ 1,110,000 Marketable securities 0 300,000 Accounts receivable, net 2,500,000 1,600,000 Inventory 3,550,000 2,000,000 Prepaid expenses 250,000 190,000 Total current assets 7,250,000 5,200,000 Plant and equipment, net 9,420,000 9,000,000 Total assets $ 16,670,000 $ 14,200,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,960,000 $ 2,880,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,600,000 5,920,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,070,000 1,280,000 Total stockholders' equity 9,070,000 8,280,000 Total liabilities and stockholders' equity $ 16,670,000 $ 14,200,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,810,000 $ 13,080,000 Cost of goods sold 12,648,000 9,810,000 Gross margin 3,162,000 3,270,000 Selling and administrative expenses 1,183,714 1,584,000 Net operating income 1,978,286 1,686,000 Interest expense 364,000 304,000 Net income before taxes 1,614,286 1,382,000 Income taxes (30%) 484,286 414,600 Net income 1,130,000 967,400 Common dividends 340,000 483,700 Net income retained 790,000 483,700 Beginning retained earnings 1,280,000 796,300 Ending retained earnings $ 2,070,000 $ 1,280,000 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 1.2 Average collection period 40 days Average sale period 60 days Return on assets 8.7 % Debt-to-equity ratio 0.66 Times interest earned ratio 5.7 Price-earnings ratio 10 Required: 1. Present the balance sheet in common-size format. 2. Present the income statement in common-size format down through net income.

resent the balance sheet in common-size format. (Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Lydex Company Common-Size Balance Sheets This Year Last Year Assets Current assets: Cash % % Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets 0.0 0.0 Plant and equipment, net Total assets 0.0 % 0.0 % Liabilities and Stockholders' Equity Liabilities: Current liabilities % % Note payable, 10% Total liabilities 0.0 0.0 Stockholders’ equity: Common stock, $70 par value Retained earnings Total stockholders’ equity 0.0 0.0 Total liabilities and equity 0.0 % 0.0 %

resent the income statement in common-size format down through net income. (Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

	Lydex Company Common-Size Income Statements This Year Last Year Sales % % Cost of goods sold Gross margin Selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes (30%) Net income % %

Answer 1

Ans. 1	LYDEX   COMPANY
	Common - Size Balance Sheets
		This Year		Last Year
		Amount	%	Amount	%
	Assets
	Current Assets:
	Cash	$950,000	5.7%	$1,110,000	7.8%
	Marketable securities	$0	0.0%	$300,000	2.1%
	Accounts receivable (net)	$2,500,000	15.0%	$1,600,000	11.3%
	Inventory	$3,550,000	21.3%	$2,000,000	14.1%
	Prepaid expenses	$250,000	1.5%	$190,000	1.3%
	Total current assets	$7,250,000	43.5%	$5,200,000	36.6%
	Plant and equipment (net)	$9,420,000	56.5%	$9,000,000	63.4%
	Total assets	$16,670,000	100.0%	$14,200,000	100.0%
	Liabilities and Stockholder's Equity:
	Liabilities:
	Current Liabilities	$3,960,000	23.8%	$2,880,000	20.3%
	Notes payable, 10%	$3,640,000	21.8%	$3,040,000	21.4%
	Total liabilities	$7,600,000	45.6%	$5,920,000	41.7%
	Stockholder's equity:
	Common stock	$7,000,000	42.0%	$7,000,000	49.3%
	Retained earnings	$2,070,000	12.4%	$1,280,000	9.0%
	Total stockholder's equity	$9,070,000	54.4%	$8,280,000	58.3%
	Total liabilities and owner's equity	$16,670,000	100.0%	$14,200,000	100.0%
	*In a common size balance sheet, all precentages are calculated on the base of total assets.
	Amount is percentage for Current year =   Particular amount of Current year / Total assets * 100
	Amount is percentage for Last year =   Particular amount of Last year / Total assets * 100
Ans. 2	LYDEX   COMPANY
	Common - Size Income Statements
		This Year		Last Year
		Amount	%	Amount	%
	Sales	$15,810,000	100.00%	$13,080,000	100.00%
	Cost of goods sold	$12,648,000	80.00%	$9,810,000	75.00%
	Gross profit	$3,162,000	20.00%	$3,270,000	25.00%
	Selling and administrative expenses	$1,183,714	7.49%	$1,584,000	12.11%
	Net operating income	$1,978,286	12.51%	$1,686,000	12.89%
	Interest expense	$364,000	2.30%	$304,000	2.32%
	Net income before taxes	$1,614,286	10.21%	$1,382,000	10.57%
	Income taxes	$484,286	3.06%	$414,600	3.17%
	Net income	$1,130,000	7.15%	$967,400	7.40%
	*In a common size income statement, all precentages are calculated on the base of sales.
	Amount is percentage for Current year =   Particular amount of Current year / Sales * 100
	Amount is percentage for Last year =   Particular amount of Last year / Sales * 100