Question

Q. 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	$	900,000	$	1,030,000
Marketable securities		0		300,000
Accounts receivable, net		2,460,000		1,560,000
Inventory		3,540,000		2,400,000
Prepaid expenses		250,000		190,000
Total current assets		7,150,000		5,480,000
Plant and equipment, net		9,400,000		8,990,000
Total assets	$	16,550,000	$	14,470,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,950,000	$	2,860,000
Note payable, 10%		3,620,000		3,020,000
Total liabilities		7,570,000		5,880,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		1,480,000		1,090,000
Total stockholders' equity		8,980,000		8,590,000
Total liabilities and stockholders' equity	$	16,550,000	$	14,470,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,800,000	$	12,980,000
Cost of goods sold		12,640,000		9,735,000
Gross margin		3,160,000		3,245,000
Selling and administrative expenses		1,840,857		1,580,000
Net operating income		1,319,143		1,665,000
Interest expense		362,000		302,000
Net income before taxes		957,143		1,363,000
Income taxes (30%)		287,143		408,900
Net income		670,000		954,100
Common dividends		280,000		477,050
Net income retained		390,000		477,050
Beginning retained earnings		1,090,000		612,950
Ending retained earnings	$	1,480,000	$	1,090,000

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	8.6	%
Debt-to-equity ratio	0.65
Times interest earned ratio	5.9
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.

Answer 1

1)

Common Size Balance Sheet for two years

LYDEX COMPANY
COMMON SIZE BALANCE SHEET
	This Year	Last Year	This Year (%)	Last Year (%)
Current Assets
Cash	900,000	1,030,000	5.4%	7.1%
Marketable Securities	-	300,000	0.0%	2.1%
Accounts Receivable	2,460,000	1,560,000	14.9%	10.8%
Inventory	3,540,000	2,400,000	21.4%	16.6%
Prepaid Expense	250,000	190,000	1.5%	1.3%
Total Current Assets	7,150,000	5,480,000	43.2%	37.9%
Total Fixed Assets	9,400,000	8,990,000	56.8%	62.1%
Total Assets	16,550,000	14,470,000	100.0%	100.0%
Current Liabilities
Total Current Liabilities	3,950,000	2,860,000	23.9%	19.8%
Notes Payable @10%	3,620,000	3,020,000	21.9%	20.9%
Total Liabilities	7,570,000	5,880,000	45.7%	40.6%
Common Stock	7,500,000	7,500,000	45.3%	51.8%
Retained Earnings	1,480,000	1,090,000	8.9%	7.5%
Total Stock Holders Equity and Total Liabilities	16,550,000	14,470,000	100.0%	100.0%

Here Percentage of items calculated by the formula of

For the asset items = Individual Item / Total asset x 100%

For the Liabilities = Individual Item / Total Liabilities x 100%

2)

COMMON SIZE INCOME STATEMENT AS FOLLOWS:

LYDEX COMPANY
COMMON SIZE BALANCE SHEET
	This Year	Last Year	This Year (%)	Last Year (%)
Sales (All Accounts)	15,800,000	12,980,000	100.0%	100.0%
Cost of Goods Sold	12,640,000	9,735,000	80.0%	75.0%
Gross Margin	3,160,000	3,245,000	20.0%	25.0%
Selling and Administrative Expense	1,840,857	1,580,000	11.7%	12.2%
Net Operating Income	1,319,143	1,665,000	8.3%	12.8%
Interest Expense	362,000	302,000	2.3%	2.3%
Net Income Before Taxes	957,143	1,363,000	6.1%	10.5%
Income Taxes (30%)	287,143	408,900	1.8%	3.2%
Net Income	670,000	954,100	4.2%	7.4%

The percentage of individual item is calculated by dividing respecive individual items.