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 $ 920,000 $ 1,250,000
Marketable securities 0 300,000
Accounts receivable, net 2,540,000 1,640,000
Inventory 3,560,000 2,100,000
Prepaid expenses 250,000 190,000
Total current assets 7,270,000 5,480,000
Plant and equipment, net 9,440,000 9,010,000
Total assets $ 16,710,000 $ 14,490,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 3,600,000 $ 2,900,000
Note payable, 10% 3,640,000 3,040,000
Total liabilities 7,240,000 5,940,000
Stockholders' equity:
Common stock, $75 par value 7,500,000 7,500,000
Retained earnings 1,970,000 1,050,000
Total stockholders' equity 9,470,000 8,550,000
Total liabilities and stockholders' equity $ 16,710,000 $ 14,490,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,820,000 $ 13,180,000
Cost of goods sold 12,656,000 9,885,000
Gross margin 3,164,000 3,295,000
Selling and administrative expenses 1,000,000 1,588,000
Net operating income 2,164,000 1,707,000
Interest expense 364,000 304,000
Net income before taxes 1,800,000 1,403,000
Income taxes (30%) 540,000 420,900
Net income 1,260,000 982,100
Common dividends 340,000 491,050
Net income retained 920,000 491,050
Beginning retained earnings 1,050,000 558,950
Ending retained earnings $ 1,970,000 $ 1,050,000

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 8.8 %
Debt-to-equity ratio 0.67
Times interest earned ratio 5.8
Price-earnings ratio 10

Required:

1. Present the balance sheet in common-size format.

Present the balance sheet in common-size format. (Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Lydex Company
Common-Size Balance Sheets
This Year Last Year
Assets
Current assets:
Cash % %
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets % %
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities % %
Note payable, 10%
Total liabilities
Stockholders’ equity:
Common stock, $75 par value
Retained earnings
Total stockholders’ equity
Total liabilities and equity % %

2. Present the income statement in common-size format down through net income

Present the income statement in common-size format down through net income. (Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Lydex Company
Common-Size Income Statements
This Year Last Year
Sales % %
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income % %

.

Solutions

Expert Solution

Solution

Lydex Company
Common size Balance Sheet
This Year Last Year
Assets
Current assets:
Cash 5.5% 8.6%
Marketable securities 0.0% 2.1%
Accounts receivable, net 15.2% 11.3%
Inventory 21.3% 14.5%
Prepaid expenses 1.5% 1.3%
Total current assets 43.5% 37.8%
Plant and equipment, net 56.5% 62.2%
Total assets 100.0% 100.0%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities 21.5% 20.0%
Bonds payable, 12% 21.8% 21.0%
Total liabilities 43.3% 41.0%
Stockholders' equity:
Common stock, $15 par value 44.9% 51.8%
Retained earnings 11.8% 7.2%
Total stockholders' equity 56.7% 59.0%
Total liabilities and stockholders' equity 100.0% 100.0%

.

Lydex Company
Common size income statement
This Year Last Year
Sales (all on account) 100.0% 100.0%
Cost of goods sold 80.0% 75.0%
Gross margin 20.0% 25.0%
Selling and administrative expenses 6.3% 12.0%
Net operating income 13.7% 13.0%
Interest expense 2.3% 2.3%
Net income before taxes 11.4% 10.6%
Income taxes (30%) 3.4% 3.2%
Net income 8.0% 7.5%

.


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