Question

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 $ 930,000     $ 1,170,000    
     Marketable securities 0     300,000    
     Accounts receivable, net 2,580,000     1,680,000    
     Inventory 3,570,000 2,200,000    
     Prepaid expenses 250,000     190,000    
  Total current assets 7,330,000     5,540,000    
  Plant and equipment, net 9,460,000     9,020,000    
  Total assets $ 16,790,000     $ 14,560,000    
Liabilities and Stockholders' Equity
  Liabilities:
     Current liabilities $ 3,980,000     $ 2,920,000    
     Note payable, 10% 3,640,000     3,040,000    
  Total liabilities 7,620,000     5,960,000    
  Stockholders' equity:
      Common stock, $70 par value 7,000,000     7,000,000    
      Retained earnings 2,170,000     1,600,000    
  Total stockholders' equity 9,170,000     8,600,000    
  Total liabilities and stockholders' equity $ 16,790,000     $ 14,560,000    
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
  Sales (all on account) $ 15,830,000    $ 13,280,000   
  Cost of goods sold 12,664,000    9,960,000   
  Gross margin 3,166,000    3,320,000   
  Selling and administrative expenses 1,402,000    1,592,000   
  Net operating income 1,764,000    1,728,000   
  Interest expense 364,000    304,000   
  Net income before taxes 1,400,000    1,424,000   
  Income taxes (30%) 420,000    427,200   
  Net income 980,000    996,800   
  Common dividends 410,000    498,400   
  Net income retained 570,000    498,400   
  Beginning retained earnings 1,600,000    1,101,600   
  Ending retained earnings $ 2,170,000    $ 1,600,000   

To begin your assigment 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 8.9 %          
  Debt-to-equity ratio 0.68
  Times interest earned ratio 5.9
  Price-earnings ratio 10
Required:

1. Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

2.

Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

Homework Answers

Answer #1
Lydex Company
Common size Balance Sheet
This year Last year
  Assets
  Current assets:
     Cash 5.5% 8.0%
     Marketable securities 0.0% 2.1%
     Accounts receivable, net 15.4% 11.5%
     Inventory 21.3% 15.1%
     Prepaid expenses 1.5% 1.3%
  Total current assets 43.7% 38.0%
  Plant and equipment, net 56.3% 62.0%
  Total assets 100.0% 100.0%
Liabilities and Stockholders' Equity
  Liabilities:
     Current liabilities 23.7% 20.1%
     Note payable, 10% 21.7% 20.9%
  Total liabilities 45.4% 40.9%
  Stockholders' equity:
      Common stock, $70 par value 41.7% 48.1%
      Retained earnings 12.9% 11.0%
  Total stockholders' equity 54.6% 59.1%
  Total liabilities and stockholders' equity 100.0% 100.0%
2
Lydex Company
Common size Income Statements
This year Last year
Sales 100.0% 100.0%
Cost of goods sold 80.0% 75.0%
Gross margin 20.0% 25.0%
Selling and administrative expenses 8.9% 12.0%
Net operating income 11.1% 13.0%
Interest expense 2.3% 2.3%
Net income before taxes 8.8% 10.7%
Income taxes (30%) 2.7% 3.2%
Net income 6.2% 7.5%
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