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	$	1,040,000	$	1,280,000
Marketable securities		0		300,000
Accounts receivable, net		3,020,000		2,120,000
Inventory		3,680,000		2,300,000
Prepaid expenses		270,000		210,000
Total current assets		8,010,000		6,210,000
Plant and equipment, net		9,680,000		9,130,000
Total assets	$	17,690,000	$	15,340,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,090,000	$	3,140,000
Note payable, 10%		3,720,000		3,120,000
Total liabilities		7,810,000		6,260,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,380,000		1,580,000
Total stockholders' equity		9,880,000		9,080,000
Total liabilities and stockholders' equity	$	17,690,000	$	15,340,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,940,000	$	14,380,000
Cost of goods sold		12,752,000		10,785,000
Gross margin		3,188,000		3,595,000
Selling and administrative expenses		1,216,000		1,636,000
Net operating income		1,972,000		1,959,000
Interest expense		372,000		312,000
Net income before taxes		1,600,000		1,647,000
Income taxes (30%)		480,000		494,100
Net income		1,120,000		1,152,900
Common dividends		320,000		576,450
Net income retained		800,000		576,450
Beginning retained earnings		1,580,000		1,003,550
Ending retained earnings	$	2,380,000	$	1,580,000

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	8.6	%
Debt-to-equity ratio	0.69
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

		Lydex Company
		Comparative Balance Sheet - Common size
			This Year	Last Year	% as of this year		% as of last year
		Assets			%	Calculation	%	Calculation
		Current assets:
		Cash	1,040,000	1,280,000	5.88%	(1,040,000/17,690,000)	9.00%	(1,280,000/15,340,000)
		Marketable securities	0	300,000	0.00%	(0/17,690,000)	1.96%	(300,000/15,340,0)
		Accounts receivable, net	3,020,000	2,120,000	17.07%	(3,020,000/17,690,000)	13.82%	(2,120,000/15,340,000)
		Inventory	3,680,000	2,300,000	20.80%	(3,680,000/17,690,000)	14.99%	(2,300,000/15,340,000)
		Prepaid expenses	270,000	210,000	1.53%	(270,000/17,690,000)	1.37%	(210,000/15,340,000)
		Total current assets	8,010,000	6,210,000	45.28%	(8,010,000/17,690,000)	40.48%	(6,210,000/15,340,000)
		Plant and equipment, net	9,680,000	9,130,000	54.72%	(9,680,000/17,690,000)	59.52%	(9,130,000/15,340,000)
		Total assets	17,690,000	15,340,000	100%	(17,690,000/17,690,000)	100%	(15,340,000/15,340,000)
		Liabilities and Stockholders' Equity
		Liabilities:
		Current liabilities	4,090,000	3,140,000	23.12%	(4,090,000/17,690,000)	20.47%	(3,140,000/15,340,000)
		Note payable, 10%	3,720,000	3,120,000	21.03%	(3,720,000/17,690,000)	20.34%	(3,120,000/15,340,000)
		Total liabilities	7,810,000	6,260,000	44.15%	(7,810,000/17,690,000)	40.81%	(6,260,000/15,340,000)
		Stockholders' equity:
		Common stock, $75 par value	7,500,000	7,500,000	42.40%	(7,500,000/17,690,000)	48.89%	(7,500,000/15,340,000)
		Retained earnings	2,380,000	1,580,000	13.45%	(2,380,000/17,690,000)	10.30%	(1,580,000/15,340,000)
		Total stockholders' equity	9,880,000	9,080,000	55.85%	(9,880,000/17,690,000)	59.19%	(9,080,000/15,340,000)
		Total liabilities and stockholders' equity	17,690,000	15,340,000	100%	(17,690,000/17,690,000)	100%	(15,340,000/15,340,000)
		Lydex Company			% as of this year		% as of last year
		Comparative Income Statement- common size			%	Calculation	%	Calculation
		Sales (all on account)	15,940,000	14,380,000	100%		100%
		Cost of goods sold	12,752,000	10,785,000	80.00%	(12,752,000/15,940,000)	75.00%	(10,785,000/14,380,000)
		Gross margin	3,188,000	3,595,000	20.00%	(3,188,000/15,940,000)	25.00%	(3,595,000/14,380,000)
		Selling and administrative expenses	1,216,000	1,636,000	7.63%	(1,216,000/15,940,000)	11.38%	(1,636,000/14,380,000)
		Net operating income	1,972,000	1,959,000	12.37%	(1,972,000/15,940,000)	13.62%	(1,959,000/14,380,000)
		Interest expense	372,000	312,000	2.33%	(372,000/15,940,000)	2.17%	(312,000/14,380,000)
		Net income before taxes	1,600,000	1,647,000	10.04%	(1,600,000/15,940,000)	11.45%	(1,647,000/14,380,000)
		Income taxes (30%)	480,000	494,100	3.01%	(480,000/15,940,000)	3.44%	(494,100/14,380,000)
		Net income	1,120,000	1,152,900	7.03%	(1,120,000/15,940,000)	8.02%	(1,152,900/14,380,000)
		Common dividends	320,000	576,450	2.01%	(320,000/15,940,000)	4.01%	(576,450/14,380,000)
		Net income retained	800,000	576,450	5.02%	(800,000/15,940,000)	4.01%	(576,450/14,380,000)
		Beginning retained earnings	1,580,000	1,003,550
		Ending retained earnings	2,380,000	1,580,000