Question

Problem 14-16 Common-Size Financial Statements [LO14-1]

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	$	950,000	$	1,110,000
Marketable securities		0		300,000
Accounts receivable, net		2,500,000		1,600,000
Inventory		3,550,000		2,000,000
Prepaid expenses		250,000		190,000
Total current assets		7,250,000		5,200,000
Plant and equipment, net		9,420,000		9,000,000
Total assets	$	16,670,000	$	14,200,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,960,000	$	2,880,000
Note payable, 10%		3,640,000		3,040,000
Total liabilities		7,600,000		5,920,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,070,000		1,280,000
Total stockholders' equity		9,070,000		8,280,000
Total liabilities and stockholders' equity	$	16,670,000	$	14,200,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,810,000	$	13,080,000
Cost of goods sold		12,648,000		9,810,000
Gross margin		3,162,000		3,270,000
Selling and administrative expenses		1,183,714		1,584,000
Net operating income		1,978,286		1,686,000
Interest expense		364,000		304,000
Net income before taxes		1,614,286		1,382,000
Income taxes (30%)		484,286		414,600
Net income		1,130,000		967,400
Common dividends		340,000		483,700
Net income retained		790,000		483,700
Beginning retained earnings		1,280,000		796,300
Ending retained earnings	$	2,070,000	$	1,280,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	40	days
Average sale period	60	days
Return on assets	8.7	%
Debt-to-equity ratio	0.66
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.

Answer 1

The common size Balance Sheet will be prepared as under:

	This Year		Last Year
	Amount $	%	Amount $	%
Assets
Current assets:
Cash	9,50,000	5.70%	11,10,000	7.82%
Marketable securities	0	0.00%	3,00,000	2.11%
Accounts receivable, net	25,00,000	15.00%	16,00,000	11.27%
Inventory	35,50,000	21.30%	20,00,000	14.08%
Prepaid expenses	2,50,000	1.50%	1,90,000	1.34%
Total current assets	72,50,000	43.49%	52,00,000	36.62%
Plant and equipment, net	94,20,000	56.51%	90,00,000	63.38%
Total assets	166,70,000	100.00%	142,00,000	100.00%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	39,60,000	23.76%	28,80,000	20.28%
Note payable, 10%	36,40,000	21.84%	30,40,000	21.41%
Total liabilities	76,00,000	45.59%	59,20,000	41.69%
Stockholders' equity:
Common stock, $70 par value	70,00,000	41.99%	70,00,000	49.30%
Retained earnings	20,70,000	12.42%	12,80,000	9.01%
Total stockholders' equity	90,70,000	54.41%	82,80,000	58.31%
Total liabilities and stockholders' equity	166,70,000	100.00%	142,00,000	100.00%

Common Size Income Statement will be prepared as under:

	This Year		Last Year
	Amount $	%	Amount $	%
Sales (all on account)	158,10,000	100.00%	130,80,000	100.00%
Cost of goods sold	126,48,000	80.00%	98,10,000	75.00%
Gross margin	31,62,000	20.00%	32,70,000	25.00%
Selling and administrative expenses	11,83,714	7.49%	15,84,000	12.11%
Net operating income	19,78,286	12.51%	16,86,000	12.89%
Interest expense	3,64,000	2.30%	3,04,000	2.32%
Net income before taxes	16,14,286	10.21%	13,82,000	10.57%
Income taxes (30%)	4,84,286	3.06%	4,14,600	3.17%
Net income	11,30,000	7.15%	9,67,400	7.40%

Notes & Workings

To prepare common size Balance Sheet, all items of balance sheet will be expressed as a percentage of total assets.

To prepare common size Income Statement, all items of income statement will be expressed as a percentage of net sales.

Please comment in case of any issue and I will be happy to help.