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	$	970,000	$	1,210,000
Marketable securities		0		300,000
Accounts receivable, net		2,740,000		1,840,000
Inventory		3,610,000		2,100,000
Prepaid expenses		260,000		200,000
Total current assets		7,580,000		5,650,000
Plant and equipment, net		9,540,000		9,060,000
Total assets	$	17,120,000	$	14,710,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,020,000	$	3,000,000
Note payable, 10%		3,680,000		3,080,000
Total liabilities		7,700,000		6,080,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,420,000		1,630,000
Total stockholders' equity		9,420,000		8,630,000
Total liabilities and stockholders' equity	$	17,120,000	$	14,710,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,870,000	$	13,680,000
Cost of goods sold		12,696,000		10,260,000
Gross margin		3,174,000		3,420,000
Selling and administrative expenses		1,106,000		1,608,000
Net operating income		2,068,000		1,812,000
Interest expense		368,000		308,000
Net income before taxes		1,700,000		1,504,000
Income taxes (30%)		510,000		451,200
Net income		1,190,000		1,052,800
Common dividends		400,000		526,400
Net income retained		790,000		526,400
Beginning retained earnings		1,630,000		1,103,600
Ending retained earnings	$	2,420,000	$	1,630,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

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	0.0		0.0
Plant and equipment, net
Total assets	0.0	%	0.0	%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities		%		%
Note payable, 10%
Total liabilities	0.0		0.0
Stockholders’ equity:
Common stock, $70 par value
Retained earnings
Total stockholders’ equity	0.0		0.0
Total liabilities and equity

Answer 1

Lydex Company
Common-Size Balance Sheets
	This Year	Last Year
Assets
Current assets:
Cash	5.7%	8.2%
Marketable securities	0.0%	2.0%
Accounts receivable, net	16.0%	12.5%
Inventory	21.1%	14.3%
Prepaid expenses	1.5%	1.4%
Total current assets	44.3%	38.4%
Plant and equipment, net	55.7%	61.6%
Total assets	100.0%	100.0%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	23.5%	20.4%
Note payable, 10%	21.5%	20.9%
Total liabilities	45.0%	41.3%
Stockholders’ equity:
Common stock, $70 par value	40.9%	47.6%
Retained earnings	14.1%	11.1%
Total stockholders’ equity	55.0%	58.7%
Total liabilities and equity	100.0%	100.0%