CASE

In September of 2013, Dytex Ltd. began the companys annual planning process. At one of its monthly management meetings, John Lipton, CEO of the company, informed managers that, over the next several years, the economic and industry conditions appeared extremely positive.

He asked Arlene Gibson to make a brief presentation of the companys financial statements for the years 2012 (actual) and 2013 (year-end forecast).

After the presentation, Mr. Lipton gave a rough idea of his key strategic goals based on the following planning assumptions:

First, were going to be aiming for a 15% increase in revenue in 2014. This is based on the premise that three of the four sectors in which our divisions compete in will show growth close to 13%. With our new product lines that we are going to introduce in the marketplace, coupled with some creative advertisements and innovative marketing strategies, we should not have problems in achieving that growth. Nevertheless, we will have to make sure that we have the physical, financial, and human resource means to achieve this growth rate.

Second, the return on revenue over the past several years has been less than the ones experienced by our key competitors. In 2012, our return on revenue was 4.7% and based on our most recent forecast, we expect to show 6.1% by the end of this year. Our key competitors are showing performance in the area of 7 to 9%. In fact, we should use Gilmore Inc. as our benchmark; their return on revenue is 10%. I do know that there is room for improvement in efficiencies in both costs of production and marketing, and our managers should make every effort to cut costs, improve efficiencies, eliminate waste, and be more economical in the way that they operate.

Third, our divisions expect to invest substantial sums of money in capital assets in 2014: modernizations, acquisition of new assets, investment in research and development, and the expansion of two plants. Following our discussions of the past several meetings and some preliminary reports that I have received from your divisional controllers, I estimate a $20 million investment in capital assets.

ANALYSIS

During the November special budget sessions, Arlene Gibson presented the consolidated financial statements for the years 2012 (actual), 2013 (year-end forecast) and the 2014 (budget year). The statements of income is presented in Table 7.1, the statements of financial position in Table 7.2, the consolidated statements of cash flows in Table 7.3, and the key financial resul

Table 7.2 Dytex Ltd.s Statements of Financial Position

Table 7.3 Dytex Ltd.s Financial Performance

Arlene Gibson summarized the financial results by saying that Dylexs financial performance for the year 2014 looked (negative/positive). The two most critical numbers on the statement of income (Table 7.1) were revenue, which showed a (?)% (increase/decrease) in 2014 over 2013 and a return on revenue (increasing/decreasing from ?% in 2012 to ?% in 2014, a ?% jump.

The statements of financial position (Table 7.2) also indicated an improvement/decline in the debt-to-total assets ratio. In 2012, ?% of the assets were financed by debt. Despite the $? million investment or ?% increase/decrease in assets in 2014, the debt-to-total assets ratio would drop/up to ?%. All other ratios related to the statements of financial position showed positive/negative developments. The current ratio would go from ? in 2012 to ? in 2014 while times-interest-earned would should an improvement from ? times to ? times over the same time period. She also pointed out the following fixed payments during the planning period:

(in thousands of $) 2012 2013 2014

Lease payments ? ? ?

Most significant were the statements of cash flows for the years 2013 and 2014 (Table 7.3). Dytex was planning to invest $22 million in capital assets and over 82% of the sources of financing would be generated internally (profit for the year for $? million, depreciation for $? million, and a small outflow in working capital accounts for $000,000).

All financial ratios appeared to be going in the right/wrong direction. Liquidity, debt/coverage, asset-management, and profitability were showing improvements/decline. The company financial health also showed a positive/negative direction from ? in 2012 to ? in 2014 a target that Lipton was shooting for. Also, the financial results showed that the company would (not or would) have a problem growing by ?% in revenue since the sustainable growth rate was ?%.

DECISION

Mr. Lipton was pleased/disappointed with the statements and indicated that he was/not prepared to present them to the next meeting of the board for review and approval.