In: Accounting
42. 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 |
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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 |
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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.
Ans. 1 | LYDEX COMPANY | ||||
Common - Size Balance Sheets | |||||
This Year | Last Year | ||||
Amount | % | Amount | % | ||
Assets | |||||
Current Assets: | |||||
Cash | $820,000 | 4.8% | $1,060,000 | 7.1% | |
Marketable securities | $0 | 0.0% | $300,000 | 2.0% | |
Accounts receivable (net) | $2,860,000 | 16.6% | $1,960,000 | 13.0% | |
Inventory | $3,640,000 | 21.2% | $2,400,000 | 16.0% | |
Prepaid expenses | $270,000 | 1.6% | $210,000 | 1.4% | |
Total current assets | $7,590,000 | 44.2% | $5,930,000 | 39.5% | |
Plant and equipment (net) | $9,600,000 | 55.8% | $9,090,000 | 60.5% | |
Total assets | $17,190,000 | 100.0% | $15,020,000 | 100.0% | |
Liabilities and Stockholder's Equity: | |||||
Liabilities: | |||||
Current Liabilities | $4,050,000 | 23.6% | $3,060,000 | 20.4% | |
Notes payable, 10% | $3,700,000 | 21.5% | $3,100,000 | 20.6% | |
Total liabilities | $7,750,000 | 45.1% | $6,160,000 | 41.0% | |
Stockholder's equity: | |||||
Common stock | $7,500,000 | 43.6% | $7,500,000 | 49.9% | |
Retained earnings | $1,940,000 | 11.3% | $1,360,000 | 9.1% | |
Total stockholder's equity | $9,440,000 | 54.9% | $8,860,000 | 59.0% | |
Total liabilities and owner's equity | $17,190,000 | 100.0% | $15,020,000 | 100.0% | |
*In a common size balance sheet, all percentages are calculated on the base of total assets. | |||||
Amount is percentage for This year = Particular amount of This 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 | $15,900,000 | 100.00% | $13,980,000 | 100.00% | |
Cost of goods sold | $12,720,000 | 80.00% | $10,485,000 | 75.00% | |
Gross profit | $3,180,000 | 20.00% | $3,495,000 | 25.00% | |
Selling and administrative expenses | $1,410,000 | 8.87% | $1,620,000 | 11.59% | |
Net operating income | $1,770,000 | 11.13% | $1,875,000 | 13.41% | |
Interest expense | $370,000 | 2.33% | $310,000 | 2.22% | |
Net income before taxes | $1,400,000 | 8.81% | $1,565,000 | 11.19% | |
Income taxes | $420,000 | 2.64% | $469,500 | 3.36% | |
Net income | $980,000 | 6.16% | $1,095,500 | 7.84% | |
*In a common size income statement, all percentages are calculated on the base of sales. | |||||
Amount is percentage for Thisyear = Particular amount of Thisyear / Sales * 100 | |||||
Amount is percentage for Last year = Particular amount of Last year / Sales * 100 |