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.

1a. Present the income statement in common-size format down through net income.

Answer 1

LYDEX COMPANY

Common-Size Balance Sheet

Items	Amount	Percentage	Amount	Percentage
Current Assets:-
Cash	970,000	5.67%	1,210,000	8.23%
Marketable Securities	0	0	300,000	2.04%
Accounts Receivable	2,740,000	16%	1,840,000	12.50%
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 & Equipment	9,540,000	55.72%	9,060,000	61.59%
Total Assets	17,120,000	100%	14,710,000	100%
Liabilities and Stockholders'Equity:-
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	14.13%	1,630,000	11.08%
Total Stockholders'Equity	9,420,000	55.02%	8,630,000	58.67%
Total Liabilities & Stockholders'Equity	17,120,000	100%	14,710,000	100%

Calculations for percentage:-

Total of Assets & Liabilities are base.

Cash % for first year=(970,000/17,120,000)×100=5.67%

Cash%for Second year=(1,210,000/14,710,000)×100=8.23%

And others are like above.

LYDEX COMPANY

Common-Size Income Statement

Items	Amount	Percentage	Amount	Percentage
Sales	15,870,000	100%	13,680,000	100%
Less:- Cost of Goods Sold	12,696,000	80%	10,260,000	75%
Gross Margin	3,174,000	20%	3,420,000	25%
Less:- Expenses:-
Selling& 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%
Less:- Interest Expenses	368,000	2.32%	308,000	2.25%
Net Income before Taxes	1,700,000	10.71%	1,504,000	11%
Less:- Income Tax	510,000	3.21%	451,200	3.30%
Net Income	1,190,000	7.50%	1,052,800	7.70%
Common Dividend	400,000	2.52%	526,400	3.85%
Net Income Retained	790,000	4.98%	526,000	3.85%
Beginning retained Earnings	1,630,000		1,103,600
Ending Retained Earnings	2,420,000		1,630,000

In Common-Size Income Statement Sales are Base.

Cost of goods sold%=(12,696,000/15,870,000)×100=80%

Cost of goods sold% For second year=(10,260,000/13,680,000)×100=75%