You have just been hired as a financial analyst for LydexCompany, a manufacturer of safety helmets. Your boss has asked youto perform a comprehensive analysis of the company’s financialstatements, including comparing Lydex’s performance to its majorcompetitors. The company’s financial statements for the last twoyears are as follows:
Lydex Company
Comparative Balance Sheet |
| This Year | Last Year |
| Assets | | | | |
| Current assets: | | | | |
| Cash | $ | 980,000 | $ | 1,140,000 |
| Marketable securities | | 0 | | 300,000 |
| Accounts receivable, net | | 2,780,000 | | 1,880,000 |
| Inventory | | 3,620,000 | | 2,200,000 |
| Prepaid expenses | | 260,000 | | 200,000 |
| Total current assets | | 7,640,000 | | 5,720,000 |
| Plant and equipment, net | | 9,560,000 | | 9,070,000 |
| Total assets | $ | 17,200,000 | $ | 14,790,000 |
| Liabilities and Stockholders' Equity | | | | |
| Liabilities: | | | | |
| Current liabilities | $ | 4,030,000 | $ | 2,780,000 |
| Note payable, 10% | | 3,680,000 | | 3,080,000 |
| Total liabilities | | 7,710,000 | | 5,860,000 |
| Stockholders' equity: | | | | |
| Common stock, $75 par value | | 7,500,000 | | 7,500,000 |
| Retained earnings | | 1,990,000 | | 1,430,000 |
| Total stockholders' equity | | 9,490,000 | | 8,930,000 |
| Total liabilities and stockholders' equity | $ | 17,200,000 | $ | 14,790,000 |
|
Lydex Company
Comparative Income Statement and Reconciliation |
| This Year | Last Year |
| Sales (all on account) | $ | 15,880,000 | $ | 13,780,000 |
| Cost of goods sold | | 12,704,000 | | 10,335,000 |
| Gross margin | | 3,176,000 | | 3,445,000 |
| Selling and administrative expenses | | 1,436,571 | | 1,612,000 |
| Net operating income | | 1,739,429 | | 1,833,000 |
| Interest expense | | 368,000 | | 308,000 |
| Net income before taxes | | 1,371,429 | | 1,525,000 |
| Income taxes (30%) | | 411,429 | | 457,500 |
| Net income | | 960,000 | | 1,067,500 |
| Common dividends | | 400,000 | | 533,750 |
| Net income retained | | 560,000 | | 533,750 |
| Beginning retained earnings | | 1,430,000 | | 896,250 |
| Ending retained earnings | $ | 1,990,000 | $ | 1,430,000 |
|
To begin your assignment you gather the following financial dataand ratios that are typical of companies in Lydex Company’sindustry:
| | |
| Current ratio | 2.4 | |
| Acid-test ratio | 1.2 | |
| Average collection period | 32 | days |
| Average sale period | 60 | days |
| Return on assets | 9.5 | % |
| Debt-to-equity ratio | 0.68 | |
| 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 downthrough net income.
