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Problem 4-17

The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year.

Haverly Company Income Statement This Year ($000)
	$		%
Revenue	$83620		100.0
COGS	33390		39.9
Gross Margin	$50230		60.1
Expenses:
Marketing	$10976		13.1
Engineering	1910		2.3
Fin & Admin	8837		10.6
Total Exp.	$21723		26
EBIT	$28507		34.1
Interest	1277		1.5
EBT	$27230		32.6
Inc Tax	12254		14.7
Net Income	$14976		17.9

Haverly Company Balance Sheet This Year ($000)
ASSETS			LIABILITIES & EQUITY
Cash	$ 8061		Accounts payable	$ 2319
Accounts receivable	13937		Accruals	412
Inventory	7420
Current assets	$29418		Current liabilities	$ 2731
			Long-term debt	$26020
Fixed Assets			Equity
Gross	$53084		Stock accounts	$14612
Accumulated depreciation	(27549)		Retained earnings	11590
Net	$25535		Total Equity	$26202
Total assets	$54953		Total L&E	$54953

The following facts are available.

• Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 50% purchased material.
• Currently owned assets will depreciate an additional $1546000 next year.
• There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $34 million is expected to grow by 10% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 8% of the payables balance at year end.
• The combined state and federal income tax rate is 45%.
• Interest on current and future borrowing will be at a rate of 11%.

PLANNING ASSUMPTIONS

Income Statement Items

1. Revenue will grow by 15% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing.
2. The pressure on prices will result in a 2% deterioration (increase) in the next year's cost ratio.
3. Spending in the marketing department is considered excessive and will be held to 11% of revenue next year.
4. Because of a major development project, expenses in the engineering department will increase by 20%.
5. Finance and administration expenses will increase by 5%.

Assets and Liabilities

6. An enhanced cash management system will reduce cash balances by 5%.
7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)
8. The inventory turnover ratio (COGS/inventory) will decrease by 0.5x.
9. Capital spending is expected to be $6 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year.
10. Bills are currently paid in 50 days. Plans are to shorten that to 30 days.
11. A dividend totaling $1.5 million will be paid next year. No new stock will be sold.

Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts in Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement.

HAVERLY COMPANY INCOME STATEMENTS ($000)
	THIS YEAR		NEXT YEAR
	$	%	$	%
Revenue	$83620	100.0	$	100.0
COGS	33390	39.9		%
Gross Margin	$50230	60.1	$	%
Expenses:
Marketing	$10976	13.1	$	%
Engineering	1910	2.3		%
Fin & Admin	8837	10.6		%
Total Exp.	$21723	26	$	%
EBIT	$28507	34.1	$	%
Interest	1277	1.5		%
EBT	$27230	32.6	$	%
Inc Tax	12254	14.7		%
Net Income	$14976	17.9	$	%

HAVERLY COMPANY BALANCE SHEETS ($000)
ASSETS				LIABILITIES & EQUITY
	THIS YR	NEXT YR			THIS YR	NEXT YR
Cash	$ 8061	$		Accts. Pay.	$ 2319	$
Accts. Rec.	13937			Accruals	412
Inventory	7420
Curr. Assets	$29418	$		Curr. Liab.	$ 2731	$
				Long Term Debt	$26020	$
Fixed Assets				Equity
Gross	$53084	$		Stock Accts	$14612	$
Accum. Depr.	(27549)			Retained Earn	11590
Net	$25535	$		Total Equity	$26202	$
Total Assets	$54953	$		Total L & E	$54953	$

HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000)
	A/R	$
	Inventory	$
	A/P	$
	Accruals	$
		$
HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000)
OPERATING ACTIVITIES
	Net Income	$
	Depreciation
	Increase in W/C
Cash Flow From Operating Activities		$
INVESTING ACTIVITIES
Increase in Gross Fixed Assets		$
FINANCING ACTIVITIES
	Decrease in Debt	$
	Dividend	$
		$
NET CASH FLOW		$
RECONCILIATION
	Beginning Cash	$
	Net Cash Flow	$
	Ending Cash	$