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	$	980,000	$	1,140,000
Marketable securities		0		300,000
Accounts receivable, net		2,780,000		1,880,000
Inventory		3,620,000		2,200,000
Prepaid expenses		260,000		200,000
Total current assets		7,640,000		5,720,000
Plant and equipment, net		9,560,000		9,070,000
Total assets	$	17,200,000	$	14,790,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,030,000	$	2,780,000
Note payable, 10%		3,680,000		3,080,000
Total liabilities		7,710,000		5,860,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		1,990,000		1,430,000
Total stockholders' equity		9,490,000		8,930,000
Total liabilities and stockholders' equity	$	17,200,000	$	14,790,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,880,000	$	13,780,000
Cost of goods sold		12,704,000		10,335,000
Gross margin		3,176,000		3,445,000
Selling and administrative expenses		1,436,571		1,612,000
Net operating income		1,739,429		1,833,000
Interest expense		368,000		308,000
Net income before taxes		1,371,429		1,525,000
Income taxes (30%)		411,429		457,500
Net income		960,000		1,067,500
Common dividends		400,000		533,750
Net income retained		560,000		533,750
Beginning retained earnings		1,430,000		896,250
Ending retained earnings	$	1,990,000	$	1,430,000

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	32	days
Average sale period	60	days
Return on assets	9.5	%
Debt-to-equity ratio	0.68
Times interest earned ratio	5.8
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 balance sheet in common-size format

Lydex Company
Balance Sheet
	This year	Percentage	Last year	Percentage
Assets
Current assets:
cash	980000	5.70%	1140000	7.71%
marketable securities	0	0.00%	300000	2.03%
accounts receivable	2780000	16.16%	1880000	12.71%
inventory	3620000	21.05%	2200000	14.87%
prepaid expenses	260000	1.51%	200000	1.35%
total current assets	7640000	44.42%	5720000	38.67%
plant and equipment	9560000	55.58%	9070000	61.33%
total assets	17200000	100.00%	14790000	100.00%
Liabilities & stockholders equity
Liabilities:
current liabilities	4030000	23.43%	2780000	18.80%
note payable	3680000	21.40%	3080000	20.82%
total liabilities	7710000	44.83%	5860000	39.62%
Stockholders equity
common stock	7500000	43.60%	7500000	50.71%
retained earnings	1990000	11.57%	1430000	9.67%
total stockholders equity	9490000	55.17%	8930000	60.38%
total liabilities & stockholders equity	17200000	100.00%	14790000	100.00%

The income statement in common-size format

Lydex Company
Income statement
	This year	Percentage	Last year	Percentage
Sales	15880000	100.00%	13780000	100.00%
cost of goods sold	12704000	80.00%	10335000	75.00%
gross margin	3176000	20.00%	3445000	25.00%
selling and administrative expenses	1436571	9.05%	1612000	11.70%
net operating income	1739429	10.95%	1833000	13.30%
interest expense	368000	2.32%	308000	2.24%
net income before taxes	1371429	8.64%	1525000	11.07%
income tax (30%)	411429	2.59%	457500	3.32%
net income	960000	6.05%	1067500	7.75%
common dividends	400000	2.52%	533750	3.87%
net income retained	560000	3.53%	533750	3.87%
Beginning retained earnings	1430000	9.01%	896250	6.50%
Ending retained earnings	1990000	12.53%	1430000	10.38%