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	$87470		100.0
COGS	22701		26
Gross Margin	$64769		74
Expenses:
Marketing	$19219		22
Engineering	7407		8.5
Fin & Admin	3489		4
Total Exp.	$30115		34.4
EBIT	$34654		39.6
Interest	2417		2.8
EBT	$32237		36.9
Inc Tax	13217		15.1
Net Income	$19020		21.7

Haverly Company Balance Sheet This Year ($000)
ASSETS			LIABILITIES & EQUITY
Cash	$ 9351		Accounts payable	$ 1703
Accounts receivable	14578		Accruals	791
Inventory	6486
Current assets	$30415		Current liabilities	$ 2494
			Long-term debt	$36285
Fixed Assets			Equity
Gross	$76360		Stock accounts	$20716
Accumulated depreciation	(29446)		Retained earnings	17834
Net	$46914		Total Equity	$38550
Total assets	$77329		Total L&E	$77329

The following facts are available.

• Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 45% purchased material.
• Currently owned assets will depreciate an additional $1687000 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 15% 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 9% of the payables balance at year end.
• The combined state and federal income tax rate is 41%.
• Interest on current and future borrowing will be at a rate of 14%.

PLANNING ASSUMPTIONS

Income Statement Items

1. Revenue will grow by 13% 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 10% 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 $9 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 60 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	$87470	100.0	$ fill in the blank 1	100.0
COGS	22701	26	fill in the blank 2	fill in the blank 3 %
Gross Margin	$64769	74	$ fill in the blank 4	fill in the blank 5 %
Expenses:
Marketing	$19219	22	$ fill in the blank 6	fill in the blank 7 %
Engineering	7407	8.5	fill in the blank 8	fill in the blank 9 %
Fin & Admin	3489	4	fill in the blank 10	fill in the blank 11 %
Total Exp.	$30115	34.4	$ fill in the blank 12	fill in the blank 13 %
EBIT	$34654	39.6	$ fill in the blank 14	fill in the blank 15 %
Interest	2417	2.8	fill in the blank 16	fill in the blank 17 %
EBT	$32237	36.9	$ fill in the blank 18	fill in the blank 19 %
Inc Tax	13217	15.1	fill in the blank 20	fill in the blank 21 %
Net Income	$19020	21.7	$ fill in the blank 22	fill in the blank 23 %

HAVERLY COMPANY BALANCE SHEETS ($000)
ASSETS				LIABILITIES & EQUITY
	THIS YR	NEXT YR			THIS YR	NEXT YR
Cash	$ 9351	$ fill in the blank 24		Accts. Pay.	$ 1703	$ fill in the blank 25
Accts. Rec.	14578	fill in the blank 26		Accruals	791	fill in the blank 27
Inventory	6486	fill in the blank 28
Curr. Assets	$30415	$ fill in the blank 29		Curr. Liab.	$ 2494	$ fill in the blank 30
				Long Term Debt	$36285	$ fill in the blank 31
Fixed Assets				Equity
Gross	$76360	$ fill in the blank 32		Stock Accts	$20716	$ fill in the blank 33
Accum. Depr.	(29446)	fill in the blank 34		Retained Earn	17834	fill in the blank 35
Net	$46914	$ fill in the blank 36		Total Equity	$38550	$ fill in the blank 37
Total Assets	$77329	$ fill in the blank 38		Total L & E	$77329	$ fill in the blank 39

HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000)
	A/R	$ fill in the blank 40
	Inventory	$ fill in the blank 41
	A/P	$ fill in the blank 42
	Accruals	$ fill in the blank 43
		$ fill in the blank 44
HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000)
OPERATING ACTIVITIES
	Net Income	$ fill in the blank 45
	Depreciation	fill in the blank 46
	Increase in W/C	fill in the blank 47
Cash Flow From Operating Activities		$ fill in the blank 48
INVESTING ACTIVITIES
Increase in Gross Fixed Assets		$ fill in the blank 49
FINANCING ACTIVITIES
	Decrease in Debt	$ fill in the blank 50
	Dividend	$ fill in the blank 51
		$ fill in the blank 52
NET CASH FLOW		$ fill in the blank 53
RECONCILIATION
	Beginning Cash	$ fill in the blank 54
	Net Cash Flow	$ fill in the blank 55
	Ending Cash	$