QUESTION 2 (MODULE 2 - FORECASTING FINANCIAL STATEMENTS AND CASH FLOWS): A manufacturer of furniture generated in 2015-2016 revenues, profits and cash flows as shown below. For 2017 the company's managers have the following operating and investment plans: 1) The sales managers found that some customers complain about too narrow range of products offered (in terms of design, colors, etc.). Thus, they concluded that extending the range of products offered will increase annual revenues in 2017 by 30%. 2) However, extended offer will also boost operating expenses (due to higher costs of storage, transportation, etc.). As a result, net earnings are expected to grow in 2017 by 25%. 1 3) Extended range of products offered will also increase the value of inventories in 2017 by 600 (i.e. the inventories are to grow by 600 between the end of 2016 and the end of 2017). 4) As a result of increased production and volumes of orders of raw materials (wood), the company's suppliers are expected to extend their payment terms (from 14 days to 21 days), which will increase the value of operating payables in 2017 by 500 (i.e. the payables are to grow by 500 between the end of 2016 and the end of 2017). 5) The company distributes its products in its own retail points, which means that no changes of receivables are expected between the end of 2016 and the end of 2017. 6) As a result of some investments on fixed assets done in 2016, depreciation cost in 2017 is expected to grow in 2017 to 500. 7) Intended extension of product range requires purchases of new machinery and vehicles. Accordingly, the planned expenditures on fixed assets in 2017 equal 1.500 (but depreciation of those new assets will begin in 2018). However, the company intends to sell in 2017 one old vehicle for 300. 8) No changes in borrowings and no issues of new equity are planned for 2017. However, the company intends to pay a dividend in 2017, amounting to 500. The interest paid (financial costs) is expected to stay on the same level as in 2016. What will be the company's total cash flows in 2017? Will the change of cash be positive or negative? Income statement Sales revenues Profit on sales Financial costs 2015 2016 8 000 10 000 500 1 000 100 200 Pre-tax earnings Income tax Net earnings Cash flow statement 400 800 80 160 320 640 2015 2016 Net earnings 320 640 Depreciation 300 400 Change of inventory -200 -100 Change of operating liabilities -200 -200 Interest paid 100 200 Operating cash flows 320 940 Expenditures on new fixed assets -1000 -500 Investing cash flows -1 000 -500 Dividends paid -200 -320 Borrowings (net of repayments) 2000 -200 Interest paid -100 -200 Financing cash flows 1700 -720 TOTAL CASH FLOWS 1020 -280 Cash at the beginning of period 500 1 520 Cash at the end of period 1520 1 240