(4) Valencia Co. reported the following 2016 Income Statement and Balance Sheet: 2016 $ Valencia Co. Income Statement for the year end 2016 ($000s) Net sales Cost of goods sold Gross profit Operating expenses Operating income Interest expense (income), net Income from continuing operations before taxes Taxes expense from continuing operations Net income from continuing operations Net loss from discontinued operations (net of taxes) Net income 52,500 -21,000 31,500 -15,750 15,750 -1,100 14,650 -4,395 10,255 0 10,255 $ 2016 $ Valencia Co. Balance Sheet as at year end 2016 ($000s) Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Total current assets Net PPE 5,940 0 9,450 8,190 23,580 37,800 37,800 61,380 Total noncurrent assets Total assets $ $ 4,410 1,818 0 1,800 8,028 Current liabilities Accounts payable Income taxes payable Short-term debt Current portion of long-term debt Total current liabilities Noncurrent liabilities Long-term debt Total noncurrent Liabilities Total Liabilities Shareholders' equity Common stock Accumulated other comprehensive income Retained earnings Total shareholders' equity Total Liabilities and Equity 21,600 21,600 29,628 11,700 1,800 18,252 31,752 61,380 $ REQUIRED: (a) Using WORKSHEETS 1 and 2 provided on pages 7-9, forecast Valencia Co.'s 2017 Income Statement and Balance Sheet using the forecast relations provided below. Note that all turnover rates in the forecast relations are based on the ending balance of relevant accounts. Forecast assumptions and other information for Valencia Co.: Revenues growth Cost of goods sold / Revenues Operating expenses / Revenues Income taxes expense / Income from continuing operations before taxes Cash and cash equivalents / Revenues Accounts receivable turnover rate Inventories turnover rate Capital expenditures / Revenues Depreciation expense / Prior-year PPE, net Accounts payable / Cost of goods sold Income taxes payable / Income taxes expense Long-term debt due in 2017 (in thousands) Long-term debt due in 2018 (in thousands) Additional long-term debt Return on cash and cash equivalents Return on short-term investments Rate of interest for short-term debt Rate of interest for long-term debt Dividends / Net income Statutory tax rate 8.00% 40.00% 30.00% 30.00% 11.00% 5.5 2.6 18.00% 7.30% 21.00% 40.00% 1,800 1,000 0 0.5% 1.60% 4.00% 5.50% 20% 35.0% (17 marks) (b) Use two other forecasting methods different from (a) to forecast 'Inventories' in 2017, assuming a continuation of 2016 relevant account relations. Compare with the forecasted inventories amount in (a) and comment. (3 marks) (Total for question: 20 marks) WORKSHEET 1 FORMS PART OF THE ANSWER FOR QUESTION 5. ENSURE THAT THIS WORKSHEET IS ATTACHED TO YOUR ASSIGNMENT. Valencia Co. Preliminary Forecasted Income Statement Revised Forecasted Income Statement Assumptions 2017 Est. ($000s) 2016 Assumptions 2017 Est. Net sales $ 52,500 Cost of goods sold -21,000 31,500 Gross profit Operating expenses Operating income -15,750 15,750 -1,100 Interest expense (income), net Income from continuing operations before taxes 14,650 Taxes expense from continuing operations -4,395 Net income from continuing operations 10,255 Net Loss From Discontinued Operations (Net of Taxes) 0 Net income $ 10,255 WORKSHEET 2 FORMS PART OF THE ANSWER FOR QUESTION 5. ENSURE THAT THIS WORKSHEET IS ATTACHED TO YOUR ASSIGNMENT. Valencia Co. Preliminary Forecasted B/S Revised Forecasted B/S ($000s) 2016 Forecast Assumptions 2017Est. Forecast Assumptions 2017 Est. Current Assets Cash and cash equivalents $ 5,940 Short-term investments 0 Accounts receivable 9,450 Inventories 8,190 Total current assets 23,580 Net PPE 37,800 Add: CAPEX Less: depreciation Forecasted Net PPE Total noncurrent assets 37,800 Total assets $ 61,380 Current liabilities $ 4,410 Accounts payable Income taxes payable 1,818 Valencia Co. Preliminary Forecasted B/S Revised Forecasted B/S ($000s) 2016 Forecast Assumptions 2017Est. Forecast Assumptions 2017 Est. Short-term debt 0 Current portion of long-term debt 1,800 Total current liabilities 8,028 Noncurrent liabilities Long-term debt 21,600 Total noncurrent Liabilities 21,600 Total Liabilities 29,628 Shareholders' equity Common stock 11,700 Accumulated other comprehensive income 1,800 Retained earnings 18,252 Add: forecasted net income Less: forecasted dividends Forecasted R.E. Total shareholders' equity 31,752 Total Liabilities and Equity $ 61,380