Question

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	$83640		100.0
COGS	35990		43
Gross Margin	$47650		57
Expenses:
Marketing	$18169		21.7
Engineering	3653		4.4
Fin & Admin	3735		4.5
Total Exp.	$25557		30.6
EBIT	$22093		26.4
Interest	3277		3.9
EBT	$18816		22.5
Inc Tax	7903		9.4
Net Income	$10913		13

Haverly Company Balance Sheet This Year ($000)
ASSETS			LIABILITIES & EQUITY
Cash	$   6421		Accounts payable	$   2249
Accounts receivable	13940		Accruals	444
Inventory	7198
Current assets	$27559		Current liabilities	$   2693
			Long-term debt	$23937
Fixed Assets			Equity
Gross	$55564		Stock accounts	$14413
Accumulated depreciation	(29519)		Retained earnings	12561
Net	$26045		Total Equity	$26974
Total assets	$53604		Total L&E	$53604

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 $1103000 next year.
• There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $31 million is expected to grow by 13% 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 42%.
• Interest on current and future borrowing will be at a rate of 10%.

PLANNING ASSUMPTIONS

Income Statement Items

1. Revenue will grow by 12% 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 1.5% deterioration (increase) in the next year's cost ratio.
3. Spending in the marketing department is considered excessive and will be held to 20% 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 7%.

Assets and Liabilities

6. An enhanced cash management system will reduce cash balances by 10%.
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 $5 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	$83640	100.0	$	100.0
COGS	35990	43		%
Gross Margin	$47650	57	$	%
Expenses:
Marketing	$18169	21.7	$	%
Engineering	3653	4.4		%
Fin & Admin	3735	4.5		%
Total Exp.	$25557	30.6	$	%
EBIT	$22093	26.4	$	%
Interest	3277	3.9		%
EBT	$18816	22.5	$	%
Inc Tax	7903	9.4		%
Net Income	$10913	13	$	%

HAVERLY COMPANY BALANCE SHEETS ($000)
ASSETS				LIABILITIES & EQUITY
	THIS YR	NEXT YR			THIS YR	NEXT YR
Cash	$   6421	$		Accts. Pay.	$   2249	$
Accts. Rec.	13940			Accruals	444
Inventory	7198
Curr. Assets	$27559	$		Curr. Liab.	$   2693	$
				Long Term Debt	$23937	$
Fixed Assets				Equity
Gross	$55564	$		Stock Accts	$14413	$
Accum. Depr.	(29519)			Retained Earn	12561
Net	$26045	$		Total Equity	$26974	$
Total Assets	$53604	$		Total L & E	$53604	$

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	$

Answer 1

Income Statement($000)
	This Year		Next Year
	$	%	$	%
Revenue	83640	100	93677	100
COGS	35990	43	41389	44.2
Gross Margin	47650	57	52288	55.8
Expenses:				0
Marketing	18169	21.7	18735	20
Engineering	3653	4.4	4384	4.7
Fin & Admin	3735	4.5	3996	4.3
Total Exp	25557	30.6	27115	28.9
EBIT	22093	26.4	25173	26.9
Interest	3277	3.9	2394	2.6
Inc Tax	7903	9.4	9567	10.2
Net Income	10913	13	13212	14.1
Balance Sheet($000)
Assets			Liability & Equity
	This Year	Next Year		This Year	Next Year
Cash	6421	14020	Accts. Pay	2249	1552
Accts. Recv	13940	11710	Accurals	444	194
Inventory	7198	9198
Current Assets	27559	34927	Curren Liab	2693	1746
			Long Term Debt	23937	23937
Fixed Assets			Equity
Gross	55564	60564	Stock Accts	14413	14413
Accum Dep	-29519	-31122	Retained Earning	12561	24273
Net	26045	29442	Total Equity	26974	38686
Total Assets	53604	64369	Total L & E	53604	64369
Changes in Working Capital Next Year($000)
A/R	2230
Inventory	-2000
A/P	-697
Accruals	-250
TOTAL	-716
Statement of Cash Flow
Next Year ($000)
Opeating Activities
Net Income	13212
Depreciation	1603
Increase in WC	-716
Cash Flow from Operating Acivities	14099
Investing Activities
Increase in Gross Fixed Assets	-5000
Financing Activities
Decrease In Debt	0
Dividend	-1500
Net Cash Flow	7599
Reconciliation
Beginning Cash	6421
Net Cash Flow	7599
Ending Cash	14020

WORKING NOTES

	This Year	Next Year
Avereage Accounts Rece	60	45	days
Accts. Recv/Revenue*360	13940/83640*360	x/93677*360
		x=11709.625
Inventory Tunover	5	4.5	times
COGS/Inventoy	35990/7198	41389/y
		y=9197.56
Avereage Accounts Payable	50	30	days
Accts. Payable/Purchase*360	2249/(35990*0.45)*360	a/(41389*0.45)*360
		a=1552.09
Accurals
Payroll	(310+13%)*6/30 days	70
Material Accural	1552*0.08	124
		194