Question

In: Accounting

42. You have just been hired as a financial analyst for Lydex Company, a manufacturer of...

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
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.

Solutions

Expert Solution

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

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