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	$	870,000	$	1,110,000
Marketable securities		0		300,000
Accounts receivable, net		2,340,000		1,440,000
Inventory		3,510,000		2,100,000
Prepaid expenses		240,000		180,000
Total current assets		6,960,000		5,130,000
Plant and equipment, net		9,340,000		8,960,000
Total assets	$	16,300,000	$	14,090,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,750,000	$	2,660,000
Note payable, 10%		3,600,000		3,000,000
Total liabilities		7,350,000		5,660,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		1,950,000		1,430,000
Total stockholders' equity		8,950,000		8,430,000
Total liabilities and stockholders' equity	$	16,300,000	$	14,090,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,770,000	$	12,680,000
Cost of goods sold		12,616,000		9,510,000
Gross margin		3,154,000		3,170,000
Selling and administrative expenses		1,551,143		1,568,000
Net operating income		1,602,857		1,602,000
Interest expense		360,000		300,000
Net income before taxes		1,242,857		1,302,000
Income taxes (30%)		372,857		390,600
Net income		870,000		911,400
Common dividends		350,000		455,700
Net income retained		520,000		455,700
Beginning retained earnings		1,430,000		974,300
Ending retained earnings	$	1,950,000	$	1,430,000

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	1.2
Average collection period	30	days
Average sale period	60	days
Return on assets	8.3	%
Debt-to-equity ratio	0.67
Times interest earned ratio	5.9
Price-earnings ratio	10

Required:
1.	Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

2.	Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

Answer 1

Solution

Lydex Company
Common size Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash		5.3%		7.9%
Marketable securities		0.0%		2.1%
Accounts receivable, net		14.4%		10.2%
Inventory		21.5%		14.9%
Prepaid expenses		1.5%		1.3%
Total current assets		42.7%		36.4%
Plant and equipment, net		57.3%		63.6%
Total assets		100.0%		100.0%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities		23.0%		18.9%
Bonds payable, 12%		22.1%		21.3%
Total liabilities		45.1%		40.2%
Stockholders' equity:
Common stock, $15 par value		42.9%		49.7%
Retained earnings		12.0%		10.1%
Total stockholders' equity		54.9%		59.8%
Total liabilities and stockholders' equity		100.0%		100.0%

.

Lydex Company
Common size Income statement
	This Year		Last Year
Sales (all on account)		100.0%		100.0%
Cost of goods sold		80.0%		75.0%
Gross margin		20.0%		25.0%
Selling and administrative expenses		9.8%		12.4%
Net operating income		10.2%		12.6%
Interest expense		2.3%		2.4%
Net income before taxes		7.9%		10.3%
Income taxes (30%)		2.4%		3.1%
Net income		5.5%		7.2%

.