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 $ 950,000 $ 1,110,000 Marketable securities 0 300,000 Accounts receivable, net 2,500,000 1,600,000 Inventory 3,550,000 2,000,000 Prepaid expenses 250,000 190,000 Total current assets 7,250,000 5,200,000 Plant and equipment, net 9,420,000 9,000,000 Total assets $ 16,670,000 $ 14,200,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,960,000 $ 2,880,000 Note payable, 10% 3,640,000 3,040,000 Total liabilities 7,600,000 5,920,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,070,000 1,280,000 Total stockholders' equity 9,070,000 8,280,000 Total liabilities and stockholders' equity $ 16,670,000 $ 14,200,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,810,000 $ 13,080,000 Cost of goods sold 12,648,000 9,810,000 Gross margin 3,162,000 3,270,000 Selling and administrative expenses 1,183,714 1,584,000 Net operating income 1,978,286 1,686,000 Interest expense 364,000 304,000 Net income before taxes 1,614,286 1,382,000 Income taxes (30%) 484,286 414,600 Net income 1,130,000 967,400 Common dividends 340,000 483,700 Net income retained 790,000 483,700 Beginning retained earnings 1,280,000 796,300 Ending retained earnings $ 2,070,000 $ 1,280,000 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 8.7 % Debt-to-equity ratio 0.66 Times interest earned ratio 5.7 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
Common size Comparative Balance Sheet
Assets	This year	Last year
Current assets:
Cash	5.7%	7.8%
Marketable securities	0.0%	2.1%
Accounts receivable, net	15.0%	11.3%
Inventory	21.3%	14.1%
Prepaid expenses	1.5%	1.3%
Total current assets	43.5%	36.6%
Plant and equipment, net	56.5%	63.4%
Total assets	100.0%	100.0%
Liabilities and stockholders equity
Current liabilities	23.8%	20.3%
Notes payable, 10%	21.8%	21.4%
Total liabilities	45.6%	41.7%
Stockholders equity
Common stock, $70 par value	42.0%	49.3%
Retained earnings	12.4%	9.0%
Total stockholder's equity	54.4%	58.3%
Total liabilities and stockholders equity	100.0%	100.0%
Lydex company
Common size Comparative income statement and Reconciliation
	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	7.5%	12.1%
Net operating income	12.5%	12.9%
Interest expense	2.3%	2.3%
Net income before taxes	10.2%	10.6%
Income taxes (30%)	3.1%	3.2%
Net income	7.1%	7.4%
Common dividends	$340,000	$483,700
Net income retained	-$340,000	-$483,700
Beginning retained earnings	$1,280,000	$796,300
Ending retained earnings	$940,000	$312,600
Workings
Lydex Company
Common size Comparative Balance Sheet
Assets	This year	Last year
Current assets:
Cash	950000/16670000	1110000/14200000
Marketable securities	0/16670000	300000/14200000
Accounts receivable, net	2500000/16670000	1600000/14200000
Inventory	3550000/16670000	2000000/14200000
Prepaid expenses	250000/16670000	190000/14200000
Total current assets	7250000/16670000	5200000/14200000
Plant and equipment, net	9420000/16670000	9000000/14200000
Total assets	16670000/16670000	14200000/14200000
Liabilities and stockholders equity
Current liabilities	3960000/16670000	2880000/14200000
Notes payable, 10%	3640000/16670000	3040000/14200000
Total liabilities	7600000/16670000	5920000/14200000
Stockholders equity
Common stock, $70 par value	7000000/16670000	7000000/14200000
Retained earnings	2070000/16670000	1280000/14200000
Total stockholder's equity	9070000/16670000	5920000/14200000
Total liabilities and stockholders equity	16670000/16670000	14200000/14200000
Lydex company
Common size Comparative income statement and Reconciliation
	This year	Last year
Sales	15810000/15810000	13080000/13080000
Cost of goods sold	12648000/15810000	9810000/13080000
Gross margin	3162000/15810000	3270000/13080000
Selling and administrative expenses	1183714/15810000	1584000/13080000
Net operating income	1978286/15810000	1686000/13080000
Interest expense	364000/15810000	304000/13080000
Net income before taxes	1614286/15810000	1382000/13080000
Income taxes (30%)	484286/15810000	414600/13080000
Net income	1130000/15810000	967400/13080000
Common dividends	$340,000	$483,700
Net income retained	$790,000	$483,700
Beginning retained earnings	$1,280,000	$796,300
Ending retained earnings	$2,070,000	$1,280,000
Explanation: Common size balance sheet all the data is calculated based on percentage of assets.
Comon size income statement all the data is calculated based on percentage of sales.