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	$	965,000	$	1,350,000
Marketable securities		0		300,000
Accounts receivable, net		2,980,000		2,080,000
Inventory		3,670,000		2,200,000
Prepaid expenses		270,000		210,000
Total current assets		7,885,000		6,140,000
Plant and equipment, net		9,660,000		9,120,000
Total assets	$	17,545,000	$	15,260,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,080,000	$	2,500,000
Note payable, 10%		3,720,000		3,120,000
Total liabilities		7,800,000		5,620,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,745,000		2,640,000
Total stockholders' equity		9,745,000		9,640,000
Total liabilities and stockholders' equity	$	17,545,000	$	15,260,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,930,000	$	14,280,000
Cost of goods sold		12,744,000		10,710,000
Gross margin		3,186,000		3,570,000
Selling and administrative expenses		2,206,857		1,632,000
Net operating income		979,143		1,938,000
Interest expense		372,000		312,000
Net income before taxes		607,143		1,626,000
Income taxes (30%)		182,143		487,800
Net income		425,000		1,138,200
Common dividends		320,000		569,100
Net income retained		105,000		569,100
Beginning retained earnings		2,640,000		2,070,900
Ending retained earnings	$	2,745,000	$	2,640,000

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	32	days
Average sale period	60	days
Return on assets	8.5	%
Debt-to-equity ratio	0.68
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

Common size balance sheet is prepared by presenting each asset as percentage of total assets and by presenting each item of liability and stockholders’ equity as percentage of total liabilities and stockholders’ equity.

Common size income statement is prepared by presenting each item of income statement as percentage of total sales.