Scenario:
Apex Printing, Inc.
Apex Printing, Inc. is a private, domestic United States printer of periodicals, newspaper inserts, and advertising materials that accompany distributions of Sunday and weekday circulations of large metropolitan newspapers. The company, headed by CEO John Matthews, generates $450 million in revenues from three product lines (periodicals, inserts, and advertising) and has long-term contracts with several large U.S. retailers to produce weekly sales flyer inserts as well as metropolitan newspapers to produce Sunday magazine inserts and coupons. Its printing presses are characterized by offset print technology and capable of high-capacity output; in addition, the company recently migrated to water-soluble inks, which reduce manufacturing emissions considerably.
The companys executive team, employees, and above all, its Vice President (VP) of Production, Luke Stewart, are committed to environmentally sustainable manufacturing practices. Presently, the only substrate Apex uses is paper, specifically newsprint of various weights. Trim and waste are recycled in accordance with the companys sustainability commitment. Manufacturing divisions are geographically aligned with customers locations to minimize logistics cost and response time to customer requirements; however, a centralized corporate entity administers functions such as human resources, information technology, and financial reporting. The VP of Sales and Administration, James Simeon, oversees administration and quality compliance among the various divisions. There are presently five manufacturing divisions: Northwest, Southwest, Northeast, Southeast, and Midwest.
Currently, Apex is only marginally profitable, and as such, the Chief Financial Officer (CFO), Mary Francis, has indicated that external financing will be required to support a company expansion into a new segment of the printing sector: food packaging. This endeavor will require new investments in equipment as well as substrate inventory; promotional costs will also increase. In addition, Timothy Russell, the new Audit Committee Chair, has pointed out that the companys compliance with the requirements of the Sarbanes-Oxley Act (SOX) will cause administrative costs to increase, as well. But following the requirements is paramount to successfully file a registration statement and issue equity to shareholders in an initial public offering (IPO).
As the newly hired VP of finance, you report to the CFO. In this capacity, your responsibilities include preparation of financial statements, comparative analysis and benchmarking to sector performance, and assessment of new business investment opportunities to grow Apexs expansion endeavors in a challenging market.
Apex Printing
Balance Sheets
As of December 31, 2013 and 2012
000$
000$
Assets
2013
2012
Cash
6,000
5,700
Accounts Receivable
2,350
2,300
Inventory
12,100
6,500
Total Current Assets
20,450
14,500
Land
25,000
20,000
Building & Equipment
300,000
300,000
Less: Accumulated Depreciation – Building & Equipment
(187,850)
(160,000)
Total Long Term Assets
137,150
160,000
Total Assets
157,600
174,500
Liabilities and Stockholders’ Equity
Accounts Payable
4,600
3,500
Salaries Payable
0
2,100
Interest Payable
1,500
0
Short Term Notes Payable
12,000
0
Taxes Payable
0
5,600
Total Current Liabilities
18,100
11,200
Mortgate Payable
54,950
100,000
Total Long Term Liabilities
54,950
100,000
Common Stock
60,000
60,000
Retained Earnings
24,550
3,300
Total Stockholders’ Equity
84,550
63,300
Total Liabilities and Stockholders’ Equity
157,600
174,500
Apex Printing
Income Statements
For the Periods Ended December 31, 2013 and 2012
000$
000$
2013
2012
Revenue:
450,000
475,000
Less: Cost of Goods Sold
(324,300)
(374,500)
Less: Depreciation Expense
(27,850)
(26,000)
Gross Margin
97,850
74,500
Selling, General & Administrative Expenses
(29,100)
(32,000)
Income Before Interest & Taxes
68,750
42,500
Interest Expense
(7,500)
(6,000)
Income Before Taxes
61,250
36,500
Income Taxes
(35,000)
(30,000)
Net Income
26,250
6,500
Apex Printing
Statement of Cash Flows
For the Period Ended December 31, 2013
000$
Cash Flows from Operating Activities:
Net Income
26,250
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation Expense
27,850
Increase in accounts receivable
(50)
Increase in inventory
(5,600)
Decrease in salaries payable
(2,100)
Increase in interest payable
1,500
Decrease in taxes payable
(5,600)
Increase in Short Term notes Payable
12,000
Increase in accounts payable
1,100
Net Cash Flow from Operating Activities
55,350
Cash Flows from Investing Activities:
Cash paid to purchase land
(5,000)
Net Cash Flow from Investing Activities
(5,000)
Cash Flows From Financing Activities:
Cash paid for mortgage
(45,050)
Cash paid for dividends
(5,000)
Net Cash Flow from Financing Activities
(50,050)
Net Increase in Cash
300
Plus: Cash Balance at December 31, 2012
5,700
Cash Balance at December 31, 2013
6,000