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	$	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 % %

.

Answer 1

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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