Key Graphics expects to finish the current year with the financial results indicated on the worksheet given below. Develop next years income statement and ending balance sheet using that information and the following planning assumptions and facts. Note that due to an economic slowdown, Key Graphics is expecting a ten percent reduction in revenue. It is attempting to cut expenditures by an even greater percentage, resulting in a larger net profit. Work to the nearest thousand dollars.

PLANNING ASSUMPTIONS AND FACTS

Income Statement Items 1. Revenue declines by 10%. 2. The cost ratio will improve by 3%. 3. Spending in the Marketing Department will be held to 22% of revenue. 4. Engineering and Overhead expenses will be cut by 15%. 5. The combined state and federal income tax rate will be 40% 6. Interest on all borrowing will be 9 percent. 7. Interest expenses are based on 1/2 of the prior years long-term debt and 1/2 of the current years long-term debt.)

Balance Sheet Items 1. Cash balances will remain constant. 2. The ACP will be 30 days. (Use ending balances.) 3. The inventory turnover ratio will be 4 times. (Use ending balances.) 4. Capital spending is expected to be $6.0M. The average depreciation life of the assets to be acquired is 5 years and straight-line depreciation is used. Old assets will deprecation by $1,700,000. 5. Accounts payable is expected to be 40% of inventory. 6. Accruals will rise by $10,000 7. $1,500,000 of dividends will be paid. 8. There are no stock splits.

See next page for financial statements.

Key Graphics Income Statement ($000)
	THIS	YEAR	NEXT	YEAR
	$	%	$	%
Revenues	$18,000	100.0	$16,200	100.0
Less: Cost of Goods Sold	7,500	42.0
Gross Margin	$10,440	58.0
Expenses
Marketing	$4,100	22.8
Engineering	1,400	7.8
Overhead	1,500	8.3
Total Expenses	7,000	38.9
EBIT	$3,440	19.1
Less: Interest Expense	500	2.8
EBT	$2,940	16.3
Less: Income Tax	1,176	6.5
EAT	$1,764	9.8

Key Graphics Balance Sheet ($000)
ASSETS	LIABILITIES AND EQUITY
	This Year	Next Year		This Year	Next Year
Cash	$1,200		Accounts Payable	$400
Accts, Receivable	2,000		Accruals	180
Inventory	2,400		Current Liabilities	$580
Current Assets	$5,600
Gross Fixed Assets	$13,000		Long-Term Debt	$4,575
Less: Acc. Deprec.	4,800		Equity	8,645
Net Fixed Assets	$8,200		Total Capital	$13,220
Total Assets	$13,800		Total Liab.& Equity	$13,800