La Question (6) Directions: Click the "case-link" displayed above and use the information provided in Hearth and Home, Parts A and B, to answer this question: In a best-case scenario, you might assume that in the beginning of 2014 Hearth and Home hires someone to fill the new position of financial assistant. At least half of her time is expected to be devoted to administering and collecting accounts receivable. If so, which of the following hypotheses would be the most reasonable for 2014? Accounts receivable days on hand will be 41 days Accounts receivable days on hand will be 38 days Accounts receivable days on hand will be 35 days ONet profit margin will rise to 7.8 percent learth and Home Part B Hearth and Home Balance Sheets (in $000s) As At June 30: 2093 2042 2011 123 100 ASSETS Current assets Cash Accounts receivable Inventory Other current assets Total current assets 66 376 240 417 547 107 117 1.096 874 Fixed assets 313 245 Trademarks and goodwill 107 71 TOTAL ASSETS $ 1.516 $ $ 1,190 $ LIABILITIES AND OWNERS' EQUITY Current liabilities Current portion-LTD Notes payable Accounts payable Accrued expenses Other current liabilities Total current liabilities Long-term debt Other noncurrent liabilities Owners' equity 501 389 TOTAL LIABILITIES AND OWNERS' EQUITY $ 1,516 $ 1,285 $ 1,190 Working investment $ 610 $ 496 $ 452 earth and Home Part B Hearth and Home Income Statements (in $000s) Years Ended June 30: $ $ Sales Cost of goods sold Gross profit 2013 3,570 2,467 1,103 2012 3,000 2,093 907 2041 2,500 1,773 727 33 Interest expense Depreciation expense Operating expense Profit before taxes 371 345 270 Taxes 149 108 Net profit after taxes $ 196 $ Dividends 84 65 Earnings retained $ 138 $ 112 $ 97 Quick Cash Flow (in $000s) WI GFA (U) (U) Company Name: Hearth and Home S 2012 2013 196 233 0 (114) 179 204 Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross foxed assets Equals: Cash after capital investment cycle Less: Dividends declared Equals: Cash available for all debt repayment (92) 87 192 (84) 108 (95) (8) (67) Less: Current portion long-term debt (prior year Equals: Cash available for other debt repayment (67) (75) 303 Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less Accrued expenses Equals: Working investment BEGINNING ENDING 240 417 461 148 204 5764 452 496 496 Beginning working investment Less: Ending working investment Equals: A Working investment (44) Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less Accrued expenses Equals: Working investment BEGINNING 303 461 204 2012 ENDING 376 547 244 496610 496 Beginning working investment Less: Ending working investment Equals: A Working investment 20Y3 BEGINNING ENDING Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Are any changes in income taxes payable, interest payable, prepaid expenses, investments, or miscellaneous other accounts large enough to distort quick cash flow? Cash Flow Summary (in $000s) Company Name: Hearth and Home VE Line Number 2012 3.000 (63) 2.937 20Y3 3,570 (73) 3.497 12.093) 56 (2.513) (2.081) 856 (3) + 1) = 8 (586) (10) (581) (470) 386 403 (8) + (12) = (13) 29 (18) (188) (149) (18) (19) (13) + (19) = (20) (120) 266 (33) (206) 197 (36) . 0 Sales revenue (net) A Accounts receivable Cash collected from sales Cash cost of goods sold A Inventory A Accounts payable Cash paid for production Cash from trading activities Cash SG&A expense A Prepaid expenses A Accrued expenses Cash paid for operating costs Cash after operations Other income (oxpenso) Other current and non-current accounts Income tax expense A Deferred income taxes A Income taxes payable Taxes paid and other income expense Net cash after operations Interest expense A Interest payable Dividends declared or owners withdrawals Dividends payable Cash paid for dividends and interest Cash after financing costs Current portion long-term debt (prior year) Cash after debt amortization A Fixed assets A Investments A Intangibles Cash paid for plant and investments Financing surplus (requirement) A Short-term debt (notes payable) A Long-term debt A Preferred stock A Common stock Total external financing Financing surplus (requirement) + Total external financing PROOF: A Cash and marketable securities 1951 (23) (24) (25) (20) + (25) = (28) (117) 149 (131) 66 (67) (26) (27) - 28) (20) (30) (67) 82 164) 0 0 (116) (28) + (32) = (33) (152) (153) 96 (35) 0 0 (38) : (33) + (38) = ( 39 2 3 (57) (40) MU Home Company Information Part A carth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by len anson as a retailer of fireplaces and accessories, the company installed virtually all of the replaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt quality workmanship and gradually, starting six wears ago, several of the area's leading contractors began to subcontract chimney and fireplace installation to Hearth and Home. During its early years, most of the company's sales took place from October to March. As it expanded, subcontracting sales occurred throughout the year, though slightly more in the summer months. Sales are now fairly evenly divided between retail and subcontracting The Wilkinsons have financed the company with long-term debt. The family has provided term loans totaling $350,000, and your organization has provided $200,000 in long-term debt. Your organization also made available to the company what is now a $400,000 revolving credit. H and H may borrow up to 50 percent of receivables outstanding for less than 60 days and up to 40 percent of inventory, excluding inventory work in process. The company must be out of debt for 30 consecutive days during the second quarter of every calendar year. Until the end of 2043, the company was a model customer, meeting the second-quarter 30-day clean-up requirement fairly easily in 20Y1 and 2072. At the end of fiscal 20Y3, however, the company was unable to clean up the line. In fact, at the end of June, the outstanding balance was $101,000, the company having been unable to reduce the line significantly below $100.000 at any time during the entire second quarter. The balance outstanding on the last day for which you have data was $153,000 John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in deciding how to handle the loan. When the company could not meet the cleanup requirement, John waived the requirement based on the company's past history and performance. In John's opinion, H and H's management has such high integrity that your organization will be able to recover its money, he believes that the owners would sell their houses if necessary to repay the debt. Having said that, John is also aware that the owning family depends upon dividend income and considers an annual dividend of at least $80,000 to be mandatory. John is feeling the dissatisfaction of credit management, which is unhappy with his decision to waive the clean-up. He needs to come up with a solution to the problem that will meet both the company's and your organization's needs. As you and John discuss the situation, he tells you that H and H's management expects sales to increase significantly in 20Y4 and that part of that increase will be due to additional contracting mainly repairing older installations by a couple of competitors that have since gone out of business, The Wilkinsons have proposed that the limit on the revolving credit be increased to $500,000