Question
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.
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 | $70900 | 100.0 | |
| COGS | 24012 | 33.9 | |
| Gross Margin | $46888 | 66.1 | |
| Expenses: | |||
| Marketing | $13846 | 19.5 | |
| Engineering | 3835 | 5.4 | |
| Fin & Admin | 8932 | 12.6 | |
| Total Exp. | $26613 | 37.5 | |
| EBIT | $20275 | 28.6 | |
| Interest | 2894 | 4.1 | |
| EBT | $17381 | 24.5 | |
| Inc Tax | 7821 | 11 | |
| Net Income | $ 9560 | 13.5 | |
| Haverly Company Balance Sheet This Year ($000) | ||||
| ASSETS | LIABILITIES & EQUITY | |||
| Cash | $ 6311 | Accounts payable | $ 1801 | |
| Accounts receivable | 11817 | Accruals | 927 | |
| Inventory | 5336 | |||
| Current assets | $23464 | Current liabilities | $ 2728 | |
| Long-term debt | $27836 | |||
| Fixed Assets | Equity | |||
| Gross | $58259 | Stock accounts | $10186 | |
| Accumulated depreciation | (22454) | Retained earnings | 18519 | |
| Net | $35805 | Total Equity | $28705 | |
| Total assets | $59269 | Total L&E | $59269 | |
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 $1622000 next year.
There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $33 million is expected to grow by 12% 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 10% 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 12%.
PLANNING ASSUMPTIONS
Income Statement Items
Revenue will grow by 15% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing.
The pressure on prices will result in a 1% deterioration (increase) in the next year's cost ratio.
Spending in the marketing department is considered excessive and will be held to 12% of revenue next year.
Because of a major development project, expenses in the engineering department will increase by 15%.
Finance and administration expenses will increase by 8%.
Assets and Liabilities
An enhanced cash management system will reduce cash balances by 10%.
The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)
The inventory turnover ratio (COGS/inventory) will decrease by 0.5x.
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.
Bills are currently paid in 60 days. Plans are to shorten that to 40 days.
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 | $70900 | 100.0 | $ | 100.0 |
| COGS | 24012 | 33.9 | % | |
| Gross Margin | $46888 | 66.1 | $ | % |
| Expenses: | ||||
| Marketing | $13846 | 19.5 | $ | % |
| Engineering | 3835 | 5.4 | % | |
| Fin & Admin | 8932 | 12.6 | % | |
| Total Exp. | $26613 | 37.5 | $ | % |
| EBIT | $20275 | 28.6 | $ | % |
| Interest | 2894 | 4.1 | % | |
| EBT | $17381 | 24.5 | $ | % |
| Inc Tax | 7821 | 11 | % | |
| Net Income | $ 9560 | 13.5 | $ | % |
| HAVERLY COMPANY BALANCE SHEETS ($000) | ||||||||
| ASSETS | LIABILITIES & EQUITY | |||||||
| THIS YR | NEXT YR | THIS YR | NEXT YR | |||||
| Cash | $ 6311 | $ | Accts. Pay. | $ 1801 | $ | |||
| Accts. Rec. | 11817 | Accruals | 927 | |||||
| Inventory | 5336 | |||||||
| Curr. Assets | $23464 | $ | Curr. Liab. | $ 2728 | $ | |||
| Long Term Debt | $27836 | $ | ||||||
| Fixed Assets | Equity | |||||||
| Gross | $58259 | $ | Stock Accts | $10186 | $ | |||
| Accum. Depr. | (22454) | Retained Earn | 18519 | |||||
| Net | $35805 | $ | Total Equity | $28705 | $ | |||
| Total Assets | $59269 | $ | Total L & E | $59269 | $ | |||
| 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 | $ | |
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