Lucent Technologies

Lucent Technologies

I prepared a common-size balance sheet for Lucent Technologies dated for September 30, 2003 and 2004 by using Lucent Technologies Consolidated Balance Sheets found in Case Study 2.1 (Fraser, Ormiston, 2007). This common-size balance sheet will enable me to evaluate the asset, debt, and equity structure; as well as trends and changes; and the concerns of creditors and investors that may arise and what additional financial and non-financial information is needed to make investing and lending decisions for Lucent Technologies.

Lucent Technologies' current assets remain a secure 49% of total assets. Marketable securities, inventory and other current assets have increased while cash fell short by a 4% margin. Property, plant and equipment decreased by 2% between 2003 and 2004, but prepaid pension costs increased by the same percentage.

The changes I have found in the common size balance sheet are in the debt and equity structure. The total current liabilities have declined in 2004. Accounts payable and debt maturing would be a contributing factor for this downward turn. Postretirement and postemployment benefits held steady at 29%, while pension liabilities and noncurrent liabilities declined. In 2003 the percentage of debt was 121% versus 109% in 2004. This decrease in debt was accomplished by the company making more of a profit in 2004 compared to the previous year. This is an upward turn but the company is not out of the hole. Lucent Technologies seems risky with a debt percentage that is higher than the total assets percentage.

The investors and creditors should be concerned if Lucent Technologies will be able to pay its debt. The total debt is 109% of the total assets. A concern that the company could possibly go bankrupt would be a first thought. A bankruptcy prediction is an ability of an auditor to project whether the company has a going-concern problem. If it does have a problem this fact must be stated in the audit report and a qualified opinion report rendered.

The financial statement analysis would be a method used by investors and creditors to evaluate the past, current, and projected conditions and performance of Lucent Technologies. Ratio analysis is the most common form of financial analysis. It provides relative measures of the company's conditions and performance. Horizontal and vertical analysis are also popular forms. Horizontal analysis is used to evaluate the trend in the accounts over the years, while vertical analysis, also called a common size financial statement, discloses the internal structure of the firm. Vertical analysis indicates the existing relationship between sales and each income statement account. It shows the mix of assets that produce income and the mix of the sources of capital, whether by current or long-term debt or by equity funding. Security and