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) 100.0 $80900 34792 $46108 Revenue COGS Gross Margin Expenses: Marketing Engineering Fin & Admin Total Exp. EBIT Interest * $17667 9799 4931 $32397 $13711 2007 $11704 5267 $ 5437 16.9 EBT Inc Tax olir ili Net Income $ 1546 908 Haverly Company Balance Sheet This Year ($000) ASSETS LIABILITIES & EQUITY Cash $ 7761 Accounts payable Accounts 13483 Accruals receivable Inventory 8698 Current assets $29942 Current liabilities Long-term debt Fixed Assets Equity Gross $55904 Stock accounts Accumulated (29325) Retained earnings depreciation Net $26578 Total Equity $ 2454 $17358 $20847 15861 $36708 Total assets $56520 Total L&E $56520 The following facts are available. Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 40% purchased material. . Currently owned assets will depreciate an additional $1372000 next year. There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $35 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 9% 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 10%. 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 18% of revenue next year. 4. Because of a major development project, expenses in the engineering department will increase by 25%. 5. Finance and administration expenses will increase by 4%. 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 40 days. Plans are to shorten that to 30 days. 11. A dividend totaling $1 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 (5000) THIS YEAR NEXT YEAR 9 Revenue 100.0 $ 100.0 $80900 34792 $46108 57 $ COGS Gross Margin Expenses: Marketing $ $17667 9799 4931 21.8 12.1 Engineering Fin & Admin Total Exp. 40 EBIT $32397 $13711 2007 in Interest N in lin EBT $11704 Inc Tax 5267 00! Un Net Income S 6437 HAVERLY COMPANY BALANCE SHEETS (5000) NEXT YR ASSETS THIS YR $ 7761 13483 LIABILITIES & EQUITY THIS YR NEXT YR $ 1546 5 908 Accs. Pay Accruals Accts. Rec. Crventory Curr. Assets 6698 $29942 $ . Lied. Long Term Debt $ 2454 $17358 Fixed Assets $ Accum. Depr. $55904 Stock Acts (29326) Retained Earn $26578 $ Total Equity $56520 $ TotalLSE HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR (S000) $20847 15861 $36708 $56520 $ $ Total Assets AR + Inventory AP + Accruals + HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR (5000) OPERATING ACTIVITIES Net Income Depreciation Increase in W/C Cash Flow From Operating Activities INVESTING ACTIVITIES Increase in Grossed Assets FINANCING ACTIVITIES Decrease in Debt Dividend NET CASH FLOW RECONCILIATION Beginning Cash Net Cash Flow Ending Cash