Present the income statement in common-size format down

Reference no: EM13572459

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	$	320,000	$	420,000
Marketable securities		0		100,000
Accounts receivable, net		900,000		600,000
Inventory		1,300,000		800,000
Prepaid expenses		80,000		60,000

Total current assets		2,600,000		1,980,000
Plant and equipment, net		3,100,000		2,980,000

Total assets	$	5,700,000	$	4,960,000

Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	1,300,000	$	920,000
Bonds payable, 10%		1,200,000		1,000,000

Total liabilities		2,500,000		1,920,000

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		600,000		440,000

Total stockholders' equity		3,200,000		3,040,000

Total liabilities and stockholders' equity	$	5,700,000	$	4,960,000

Hedrick Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	5,250,000	$	4,160,000
Cost of goods sold		4,200,000		3,300,000

Gross margin		1,050,000		860,000
Selling and administrative expenses		530,000		520,000

Net operating income		520,000		340,000
Interest expense		120,000		100,000

Net income before taxes		400,000		240,000
Income taxes (30%)		120,000		72,000

Net income		280,000		168,000

Dividends paid:
Preferred stock		48,000		48,000
Common stock		72,000		36,000

Total dividends paid		120,000		84,000

Net income retained		160,000		84,000
Retained earnings, beginning of year		440,000		356,000

Retained earnings, end of year	$	600,000	$	440,000

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 25% 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 $20 per share last year to $36 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 Hedrick's 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. Omit the "%" sign in your response.)

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. Omit the "%" sign in your response.)

Hedrick Company Comparative Income Statements
	This Year	Last Year
Sales	%	%
Cost of goods sold

Gross margin
Selling and administrative expenses

Net operating income
Interest expense

Net income before taxes
Income taxes (30%)

Net income	%	%

Reference no: EM13572459

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