Question

In: Accounting

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

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 $ 980,000 $ 1,140,000
Marketable securities 0 300,000
Accounts receivable, net 2,780,000 1,880,000
Inventory 3,620,000 2,200,000
Prepaid expenses 260,000 200,000
Total current assets 7,640,000 5,720,000
Plant and equipment, net 9,560,000 9,070,000
Total assets $ 17,200,000 $ 14,790,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 4,030,000 $ 2,780,000
Note payable, 10% 3,680,000 3,080,000
Total liabilities 7,710,000 5,860,000
Stockholders' equity:
Common stock, $75 par value 7,500,000 7,500,000
Retained earnings 1,990,000 1,430,000
Total stockholders' equity 9,490,000 8,930,000
Total liabilities and stockholders' equity $ 17,200,000 $ 14,790,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,880,000 $ 13,780,000
Cost of goods sold 12,704,000 10,335,000
Gross margin 3,176,000 3,445,000
Selling and administrative expenses 1,436,571 1,612,000
Net operating income 1,739,429 1,833,000
Interest expense 368,000 308,000
Net income before taxes 1,371,429 1,525,000
Income taxes (30%) 411,429 457,500
Net income 960,000 1,067,500
Common dividends 400,000 533,750
Net income retained 560,000 533,750
Beginning retained earnings 1,430,000 896,250
Ending retained earnings $ 1,990,000 $ 1,430,000

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 32 days
Average sale period 60 days
Return on assets 9.5 %
Debt-to-equity ratio 0.68
Times interest earned ratio 5.8
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.

Present the balance sheet in common-size format. (Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Lydex Company
Common-Size Balance Sheets
This Year Last Year
Assets
Current assets:
Cash % %
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets % %
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities % %
Note payable, 10%
Total liabilities
Stockholders’ equity:
Common stock, $75 par value
Retained earnings
Total stockholders’ equity
Total liabilities and equity % %

Solutions

Expert Solution

  • All working forms part of the answer
  • While preparing (calculating) Common Size --
    >Balance Sheet, the percentage values of ‘Assets’ are calculated by taking ‘Total Assets’ as denominator value. The percentage of Liabilities and Equity accounts are calculated by taking ‘Total Liabilities & Stockholder’s Equity’ as denominator Value.

>Income Statement, all percentage values are calculated by taking ‘Sales’ amount as the denominator value.

  • Common Size Balance Sheet:

Lydex Company

Comparative Balance Sheet

This Year

Last Year

Assets

Current assets:

Cash

$        980,000.00

5.7%

$   1,140,000.00

7.7%

Marketable securities

$                          -  

0.0%

$       300,000.00

2.0%

Accounts receivable, net

$    2,780,000.00

16.2%

$   1,880,000.00

12.7%

Inventory

$    3,620,000.00

21.0%

$   2,200,000.00

14.9%

Prepaid expenses

$        260,000.00

1.5%

$       200,000.00

1.4%

Total current assets

$    7,640,000.00

44.4%

$   5,720,000.00

38.7%

Plant and equipment, net

$    9,560,000.00

55.6%

$   9,070,000.00

61.3%

Total assets

$ 17,200,000.00

100.0%

$ 14,790,000.00

100.0%

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities

$    4,030,000.00

23.4%

$   2,780,000.00

18.8%

Note payable, 10%

$    3,680,000.00

21.4%

$   3,080,000.00

20.8%

Total liabilities

$    7,710,000.00

44.8%

$   5,860,000.00

39.6%

Stockholders' equity:

Common stock, $75 par value

$    7,500,000.00

43.6%

$   7,500,000.00

50.7%

Retained earnings

$    1,990,000.00

11.6%

$   1,430,000.00

9.7%

Total stockholders' equity

$    9,490,000.00

55.2%

$   8,930,000.00

60.4%

Total liabilities and stockholders' equity

$ 17,200,000.00

100.0%

$ 14,790,000.00

100.0%

  • Common Size Income Statement

Lydex Company

Comparative Income Statement and Reconciliation

This Year

Last Year

Sales (all on account)

$      15,880,000.00

100.0%

$     13,780,000.00

100.0%

Cost of goods sold

$      12,704,000.00

80.0%

$     10,335,000.00

75.0%

Gross margin

$        3,176,000.00

20.0%

$        3,445,000.00

25.0%

Selling and administrative expenses

$        1,436,571.00

9.0%

$        1,612,000.00

11.7%

Net operating income

$        1,739,429.00

11.0%

$        1,833,000.00

13.3%

Interest expense

$            368,000.00

2.3%

$           308,000.00

2.2%

Net income before taxes

$        1,371,429.00

8.6%

$        1,525,000.00

11.1%

Income taxes (30%)

$            411,429.00

2.6%

$           457,500.00

3.3%

Net income

$            960,000.00

6.0%

$        1,067,500.00

7.7%


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