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	$	820,000	$	1,060,000
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		7,590,000		5,930,000
Plant and equipment, net		9,600,000		9,090,000
Total assets	$	17,190,000	$	15,020,000
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		1,940,000		1,360,000
Total stockholders' equity		9,440,000		8,860,000
Total liabilities and stockholders' equity	$	17,190,000	$	15,020,000

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		1,360,000		812,250
Ending retained earnings	$	1,940,000	$	1,360,000

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	32	days
Average sale period	60	days
Return on assets	9.7	%
Debt-to-equity ratio	0.65
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.

Required 1

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 Plant and equipment, net Total assets % % Liabilities and Stockholders' Equity Liabilities: Current liabilities % % Note payable, 10% Total liabilities Stockholders’ equity: Common stock, $75 par value Retained earnings Total stockholders’ equity Total liabilities and equity % %

Required 2

	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

Answer-1)-

Lydex Company
Common-Size Balance Sheets
Particulars		This Year	%	Last Year	%
		$		$
Current Assets:-
Cash		820000	4.8	1060000	7.1
Marketable securities		0	0.0	300000	2.0
Accounts receivable, net		2860000	16.6	1960000	13.0
Inventory		3640000	21.2	2400000	16.0
Prepaid Expenses		270000	1.6	210000	1.4
Total Current Assets		7590000	44.2	5930000	39.5
Plan & Equipment, net		9600000	55.8	9090000	60.5
Total Assets		17190000	100	15020000	100
Liabilities & Stockholder's equity
Liabilities:-
Current Liabilities		4050000	23.6	3060000	20.4
Note payable, 10%		3700000	21.5	3100000	20.6
Total Liabilities		7750000	45.1	6160000	41.0
Stockholder's Equity:-
Common stock $70 par value		7500000	43.6	7500000	49.9
Retained earnings		1940000	11.3	1360000	9.1
Total stockholders equity		9440000	54.9	8860000	59.0
Total liabilities & stockholder equity		17190000	100	15020000	100

2)-

Lydex Company
Common-Size Income Statements
Particulars	2019	Percent	2018	Percent
	$	%	$	%
Sales	15900000	100	13980000	100
Cost of goods sold	12720000	80.0	10485000	75.0
Gross margin	3180000	20.0	3495000	25.0
Selling & administrative expenses	1410000	8.9	1620000	11.6
Net Operating income	1770000	11.1	1875000	13.4
Interest expenses	370000	2.3	310000	2.2
Net income before taxes	1400000	8.8	1565000	11.2
Income taxes expenses	420000	2.6	469500	3.4
Net income	980000	6.2	1095500	7.8