In: Accounting
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 |
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This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 940,000 | $ | 1,200,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,620,000 | 1,720,000 | ||
Inventory | 3,580,000 | 2,300,000 | ||
Prepaid expenses | 250,000 | 190,000 | ||
Total current assets | 7,390,000 | 5,710,000 | ||
Plant and equipment, net | 9,480,000 | 9,030,000 | ||
Total assets | $ | 16,870,000 | $ | 14,740,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,880,000 | $ | 2,940,000 |
Note payable, 10% | 3,660,000 | 3,060,000 | ||
Total liabilities | 7,540,000 | 6,000,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,830,000 | 1,240,000 | ||
Total stockholders' equity | 9,330,000 | 8,740,000 | ||
Total liabilities and stockholders' equity | $ | 16,870,000 | $ | 14,740,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,840,000 | $ | 13,380,000 |
Cost of goods sold | 12,672,000 | 10,035,000 | ||
Gross margin | 3,168,000 | 3,345,000 | ||
Selling and administrative expenses | 1,473,429 | 1,596,000 | ||
Net operating income | 1,694,571 | 1,749,000 | ||
Interest expense | 366,000 | 306,000 | ||
Net income before taxes | 1,328,571 | 1,443,000 | ||
Income taxes (30%) | 398,571 | 432,900 | ||
Net income | 930,000 | 1,010,100 | ||
Common dividends | 340,000 | 505,050 | ||
Net income retained | 590,000 | 505,050 | ||
Beginning retained earnings | 1,240,000 | 734,950 | ||
Ending retained earnings | $ | 1,830,000 | $ | 1,240,000 |
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 | 9.1 | % |
Debt-to-equity ratio | 0.69 | |
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.