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	$	1,020,000	$	1,320,000
Marketable securities		0		300,000
Accounts receivable, net		2,940,000		2,040,000
Inventory		3,660,000		2,100,000
Prepaid expenses		270,000		210,000
Total current assets		7,890,000		5,970,000
Plant and equipment, net		9,640,000		9,110,000
Total assets	$	17,530,000	$	15,080,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,070,000	$	2,450,000
Note payable, 10%		3,700,000		3,100,000
Total liabilities		7,770,000		5,550,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,260,000		2,030,000
Total stockholders' equity		9,760,000		9,530,000
Total liabilities and stockholders' equity	$	17,530,000	$	15,080,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,920,000	$	14,180,000
Cost of goods sold		12,736,000		10,635,000
Gross margin		3,184,000		3,545,000
Selling and administrative expenses		2,028,286		1,628,000
Net operating income		1,155,714		1,917,000
Interest expense		370,000		310,000
Net income before taxes		785,714		1,607,000
Income taxes (30%)		235,714		482,100
Net income		550,000		1,124,900
Common dividends		320,000		562,450
Net income retained		230,000		562,450
Beginning retained earnings		2,030,000		1,467,550
Ending retained earnings	$	2,260,000	$	2,030,000

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	9.9	%
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.

2. Present the income statement in common-size format down through net income.

Answer 1

Ans. 1	LYDEX   COMPANY
	Common - Size Balance Sheets
		This Year	Last Year
		Amount	%	Amount	%
	Assets
	Current Assets:
	Cash	$1,020,000	5.8%	$1,320,000	8.8%
	Marketable securities	$0	0.0%	$300,000	2.0%
	Accounts receivable (net)	$2,940,000	16.8%	$2,040,000	13.5%
	Inventory	$3,660,000	20.9%	$2,100,000	13.9%
	Prepaid expenses	$270,000	1.5%	$210,000	1.4%
	Total current assets	$7,890,000	45.0%	$5,970,000	39.6%
	Plant and equipment (net)	$9,640,000	55.0%	$9,110,000	60.4%
	Total assets	$17,530,000	100.0%	$15,080,000	100.0%
	Liabilities and Stockholder's Equity:
	Liabilities:
	Current Liabilities	$4,070,000	23.2%	$2,450,000	16.2%
	Notes payable, 10%	$3,700,000	21.1%	$3,100,000	20.6%
	Total liabilities	$7,770,000	44.3%	$5,550,000	36.8%
	Stockholder's equity:
	Common stock	$7,500,000	42.8%	$7,500,000	49.7%
	Retained earnings	$2,260,000	12.9%	$2,030,000	13.5%
	Total stockholder's equity	$9,760,000	55.7%	$9,530,000	63.2%
	Total liabilities and owner's equity	$17,530,000	100.0%	$15,080,000	100.0%
	*In a common size balance sheet, all percentages 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	$15,920,000	100.00%	$14,180,000	100.00%
	Cost of goods sold	$12,736,000	80.00%	$10,635,000	75.00%
	Gross profit	$3,184,000	20.00%	$3,545,000	25.00%
	Selling and administrative expenses	$2,028,286	12.74%	$1,628,000	11.48%
	Net operating income	$1,155,714	7.26%	$1,917,000	13.52%
	Interest expense	$370,000	2.32%	$310,000	2.19%
	Net income before taxes	$785,714	4.94%	$1,607,000	11.33%
	Income taxes	$235,714	1.48%	$482,100	3.40%
	Net income	$550,000	3.45%	$1,124,900	7.93%
	*In a common size income statement, all percentages 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