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	$	970,000	$	1,210,000
Marketable securities		0		300,000
Accounts receivable, net		2,740,000		1,840,000
Inventory		3,610,000		2,100,000
Prepaid expenses		260,000		200,000
Total current assets		7,580,000		5,650,000
Plant and equipment, net		9,540,000		9,060,000
Total assets	$	17,120,000	$	14,710,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,020,000	$	3,000,000
Note payable, 10%		3,680,000		3,080,000
Total liabilities		7,700,000		6,080,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,420,000		1,630,000
Total stockholders' equity		9,420,000		8,630,000
Total liabilities and stockholders' equity	$	17,120,000	$	14,710,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,870,000	$	13,680,000
Cost of goods sold		12,696,000		10,260,000
Gross margin		3,174,000		3,420,000
Selling and administrative expenses		1,106,000		1,608,000
Net operating income		2,068,000		1,812,000
Interest expense		368,000		308,000
Net income before taxes		1,700,000		1,504,000
Income taxes (30%)		510,000		451,200
Net income		1,190,000		1,052,800
Common dividends		400,000		526,400
Net income retained		790,000		526,400
Beginning retained earnings		1,630,000		1,103,600
Ending retained earnings	$	2,420,000	$	1,630,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.4
Acid-test ratio	1.2
Average collection period	40	days
Average sale period	60	days
Return on assets	9.4	%
Debt-to-equity ratio	0.67
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.

Answer 1

Req.1 Present the balance sheet in common-size format.

Lydex Company Comparative Balance Sheet
	This Year			Last Year
Assets		Amount	Percent		Amount	Percent
Current assets:
Cash	$	970,000	5.67%	$	1,210,000	8 23%
Marketable securities		0	-		300,000	2.04%
Accounts receivable, net		2,740,000	16.00%		1,840,000	12.51%
Inventory		3,610,000	21.09%		2,100,000	14.28%
Prepaid expenses		260,000	1.52%		200,000	1.36%
Total current assets		7,580,000	44.28%		5,650,000	38.41%
Plant and equipment, net		9,540,000	55.72%		9,060,000	61.59%
Total assets	$	17,120,000	100%	$	14,710,000	100%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,020,000	23.48%	$	3,000,000	20.39%
Note payable, 10%		3,680,000	21.50%		3,080,000	20.94%
Total liabilities		7,700,000	44.98%		6,080,000	41.33%
Stockholders' equity:
Common stock, $70 par value		7,000,000	40.89%		7,000,000	47.59%
Retained earnings		2,420,000	14.14%		1,630,000	11.08%
Total stockholders' equity		9,420,000	55.02%		8,630,000	58.67%
Total liabilities and stockholders' equity	$	17,120,000	100%	$	14,710,000	100%

How to Find %:

= Particular Amount ÷ Total Assets

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

Lydex Company Comparative Income Statement and Reconciliation
	This Year			Last Year
		Amount	Percentange		Amount	Percentage
Sales (all on account)	$	15,870,000	100%	$	13,680,000	100%
Cost of goods sold		12,696,000	80%		10,260,000	75%
Gross margin		3,174,000	20%		3,420,000	25%
Selling and administrative expenses		1,106,000	6.97%		1,608,000	11.75%
Net operating income		2,068,000	13.03%		1,812,000	13.25%
Interest expense		368,000	2.32%		308,000	2.25%
Net income before taxes		1,700,000	10.71%		1,504,000	10.99%
Income taxes (30%)		510,000	3.21%		451,200	3.30%
Net income		1,190,000	7.50%		1,052,800	7.70%

How to find %

= Particualar item ÷ Sales