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 $ 860,000 $ 1,230,000 Marketable securities 0 300,000 Accounts receivable, net 2,820,000 1,920,000 Inventory 3,630,000 2,300,000 Prepaid expenses 260,000 200,000 Total current assets 7,570,000 5,950,000 Plant and equipment, net 9,580,000 9,080,000 Total assets $ 17,150,000 $ 15,030,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,550,000 $ 3,040,000 Note payable, 10% 3,680,000 3,080,000 Total liabilities 8,230,000 6,120,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 1,920,000 1,910,000 Total stockholders' equity 8,920,000 8,910,000 Total liabilities and stockholders' equity $ 17,150,000 $ 15,030,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,890,000 $ 13,880,000 Cost of goods sold 12,712,000 10,410,000 Gross margin 3,178,000 3,470,000 Selling and administrative expenses 2,124,286 1,616,000 Net operating income 1,053,714 1,854,000 Interest expense 368,000 308,000 Net income before taxes 685,714 1,546,000 Income taxes (30%) 205,714 463,800 Net income 480,000 1,082,200 Common dividends 470,000 541,100 Net income retained 10,000 541,100 Beginning retained earnings 1,910,000 1,368,900 Ending retained earnings $ 1,920,000 $ 1,910,000

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 9.6 % Debt-to-equity ratio 0.69 Times interest earned ratio 5.9 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

Ans. 1	LYDEX   COMPANY
	Common - Size Balance Sheets
		currentYear	Last Year
		Amount	%	Amount	%
	Assets
	currentAssets:
	Cash	$860,000	5.0%	$1,230,000	8.2%
	Marketable securities	$0	0.0%	$300,000	2.0%
	Accounts receivable (net)	$2,820,000	16.4%	$1,920,000	12.8%
	Inventory	$3,630,000	21.2%	$2,300,000	15.3%
	Prepaid expenses	$260,000	1.5%	$200,000	1.3%
	Total current assets	$7,570,000	44.1%	$5,950,000	39.6%
	Plant and equipment (net)	$9,580,000	55.9%	$9,080,000	60.4%
	Total assets	$17,150,000	100.0%	$15,030,000	100.0%
	Liabilities and Stockholder's Equity:
	Liabilities:
	Current Liabilities	$4,550,000	26.5%	$3,040,000	20.2%
	Notes payable, 10%	$3,680,000	21.5%	$3,080,000	20.5%
	Total liabilities	$8,230,000	48.0%	$6,120,000	40.7%
	Stockholder's equity:
	Common stock	$7,000,000	40.8%	$7,000,000	46.6%
	Retained earnings	$1,920,000	11.2%	$1,910,000	12.7%
	Total stockholder's equity	$8,920,000	52.0%	$8,910,000	59.3%
	Total liabilities and owner's equity	$17,150,000	100.0%	$15,030,000	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
		currentYear	Last Year
		Amount	%	Amount	%
	Sales	$15,890,000	100.0%	$13,880,000	100.0%
	Cost of goods sold	$12,712,000	80.0%	$10,410,000	75.0%
	Gross profit	$3,178,000	20.0%	$3,470,000	25.0%
	Selling and administrative expenses	$2,124,286	13.4%	$1,616,000	11.6%
	Net operating income	$1,053,714	6.6%	$1,854,000	13.4%
	Interest expense	$368,000	2.3%	$308,000	2.2%
	Net income before taxes	$685,714	4.3%	$1,546,000	11.1%
	Income taxes	$205,714	1.3%	$463,800	3.3%
	Net income	$480,000	3.0%	$1,082,200	7.8%
	*In a common size income statement, all percentages are calculated on the base of sales.
	Amount is percentage for This year =   Particular amount of This year / Sales * 100
	Amount is percentage for Last year =   Particular amount of Last year / Sales * 100