Page 1 c etDimensions Talent Suite Case Link Question (7) Directions: Click the Case Link above and use the information provided in Hearth and Home, Part B, to answer this question: Hearth and Home presently offers 30 day terms to its customers. If Hearth and Home changed its terms to 45 days, and as a result, all customers paid 15 days later than before, what would be the approximate effect on the company's borrowing needs in 20Y3? This is a single choice question. Selections are automatically selected as you use arrow to move O Borrowing needs would decrease by about $250,000 O Borrowing needs would increase by about $125,000 O Berrowing needs would increase by about $147,000 needs would increase by about $188,000 Mark for review Submit Hearth and Home Hearth and Home The following case information includes: Part A Company information Part B > Balance sheets > Income statements > Quick cash flow . Part C > Cash flow summary earth and Home Company Information Hearth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by Len Wilkinson as a retailer of fireplaces and accessories, the company installed virtually all of the fireplaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt, quality workmanship and gradually, starting six years 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 the year, though slightly months. Sales are now fairly evenly divided between retail and subcontracting more in the summer 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 20Y3, the company was a model customer, meeting the second-quarter 30-day clean-up requirement fairly casily in 20Y1 and 20Y2. 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 John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in When the company could not meet the cleanup requirement, John waived the requirement based on data was $153,000. deciding how to handle the loan. 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. Commercial Loans to Business Online ASCB HH.000 0913 CLBOL and Home Part B Hearth and Home Balance Sheets (in $000s) As At June 30: 20Y3 20Y2 20Y1 ASSETS Current assets Cash $ 66 376 547 107 123100 240 417 303 461 70 957 Accounts receivable Othver current assets Total current assets 874 Flxed assets 313 257 245 Trademarks and goodwil 107 71 71 TOTALASSETS $1,516 1,285 1.190 LIABILITIES AND OWNERS EQUITY Current liabilities Current portion-LTD Notes payable Accounts payable Accrued expenses Other current liabilities $ 67s67 67 101 244 69 46 527 64 28 368 148 57 47 319 Total current liabilities Long-term debt 330 397 Other noncurrent Nablities 20 19 18 Owners' equity 639 501 389 190 610 496452 TOTAL LIABILITIES AND OWNERS EQUITY 1,516 1,285 1 Working investment Hearth and Home Part B Hearth and Home Income Statements (in $000s) Years Ended June 30: 20Y3 20Y2 20Y1 Sales Cost of goods sold $3,570 3,000 2,093 907 2,467 1,103 2,500 1,773 727 Gross proft Interest expense Depreciation expense Operating expense 36 50 477371 36 60 52 345 149 196 58624 Profit before taxes 421 270 Taxes 188 108 Net profit after taxes $233 $ 233 196 $ 162 Dividends 95 84 65 Earnings retained 138 112 $ 97 Hearth and Home Part B Quick Cash Flow (in $000s) ompany Name Hearth a 20Y3 Net profit Plus: Depreclation, amortization expense Plus for less) A Working investment 196 52 Equals Cash after operating cycle Plus (or less): A Gross fxed assets Equals Cash after capital investment cyale Less Dividends declared Equals Cash available for all debt Less Current portion long-term debt (prior yean (67) (67) Equals: Cash available for other dobt repayment Change in working investment Accounts receivable (net) Plus: Inventory NG ENDING 240 303 able 148 204 Less: Accrued expenses Equals Working inv Beginning working investment Less: Ending working investment Equals. Working investment 20Y2 BEGINNING ENDING Change in working investment Accounts receivable (net) Plus: Inventory Less Accounts payable Less: Accrued expenses 303 376 244 64 610 Equals: Working investment Beginning working investment Less: Ending working investment 610 Equals: & Working investment 114) 20Y3 Change in working investment BEGINNING ENDING Accounts receivable (net) Plus 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? Page 1 c etDimensions Talent Suite Case Link Question (7) Directions: Click the Case Link above and use the information provided in Hearth and Home, Part B, to answer this question: Hearth and Home presently offers 30 day terms to its customers. If Hearth and Home changed its terms to 45 days, and as a result, all customers paid 15 days later than before, what would be the approximate effect on the company's borrowing needs in 20Y3? This is a single choice question. Selections are automatically selected as you use arrow to move O Borrowing needs would decrease by about $250,000 OBorrowing needs would increase by about $125,000 O Bgrrowing needs would increase by about $147,000 needs would increase by about $188,000 Mark for review Submit