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 $ 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
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.

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