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Problem 13-17A Common-Size Financial Statements [LO1]

You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:

Hedrick Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	304,000	$	413,000
Marketable securities		0		91,000
Accounts receivable, net		901,000		593,000
Inventory		1,330,000		800,000
Prepaid expenses		73,000		58,000
Total current assets		2,608,000		1,955,000
Plant and equipment, net		3,181,400		3,161,000
Total assets	$	5,789,400	$	5,116,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	1,260,000	$	900,000
Bonds payable, 10%		1,180,000		1,100,000
Total liabilities		2,440,000		2,000,000
Stockholders' equity:
Preferred stock, 8%, $30 par value		600,000		600,000
Common stock, $40 par value		2,000,000		2,000,000
Retained earnings		749,400		516,000
Total stockholders' equity		3,349,400		3,116,000
Total liabilities and stockholders' equity	$	5,789,400	$	5,116,000

Hedrick Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	5,270,000	$	4,220,000
Cost of goods sold		4,120,000		3,230,000
Gross margin		1,150,000		990,000
Selling and administrative expenses		510,000		510,000
Net operating income		640,000		480,000
Interest expense		118,000		110,000
Net income before taxes		522,000		370,000
Income taxes (30%)		156,600		111,000
Net income		365,400		259,000
Dividends paid:
Preferred stock		48,000		48,000
Common stock		84,000		42,000
Total dividends paid		132,000		90,000
Net income retained		233,400		169,000
Retained earnings, beginning of year		516,000		347,000
Retained earnings, end of year	$	749,400	$	516,000

Marva Rossen, who just two years ago was appointed president of Hedrick Company, admits that the company has been inconsistent in its performance over the past several years. But Rossen argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 24% increase in sales over the last year. Rossen also argues that investors have recognized the improving situation at Hedrick Company, as shown by the jump in the price of its common stock from $67 per share last year to $51 per share this year. Rossen believes that with strong leadership and with the modernized equipment that the $1,000,000 loan will enable the company to buy, profits will be even stronger in the future.

Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Hedricks industry:

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	31	days
Average sale period	60	days
Return on assets	9.5	%
Debt-to-equity ratio	0.65
Times interest earned ratio	5.7
Price-earnings ratio	10

Required:
1.	Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Hedrick Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash		%		%
Marketable securities		%		%
Accounts receivable, net		%		%
Inventory		%		%
Prepaid expenses		%		%
Total current assets		%		%
Plant and equipment, net		%		%
Total assets		%		%
Liabilities and Stockholders' equity
Liabilities:
Current liabilities		%		%
Bonds payable, 10%		%		%
Total liabilities		%		%
Stockholders' equity:
Preferred stock, 8%, $30 par value		%		%
Common stock, $40 par value		%		%
Retained earnings		%		%
Total stockholders' equity		%		%
Total liabilities and stockholders' equity		%		%

2.	Present the income statement in common-size format down through net income. (Input all amounts as positive values. Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column.)

Hedrick Company Comparative Income Statements
	This Year	Last Year
Sales (all on account)	%	%
Cost of goods sold	%	%
Gross margin	%	%
Selling and administrative expenses	%	%
Net operating income	%	%
Interest expense	%	%
Net income before taxes	%	%
Income taxes (30%)	%	%
Net income	%	%

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