Silver Cloud Computing is a new company that provides cloud computing services. The company will begin operations on April 1, 2017. It acquired financing from the issuance of common stock for $75,000,000 and long-term debt for $50,000,000. The following projected income statement and balance sheet were prepared by the external accountant prior to the start of operations. All amounts are in thousands.
Silver Cloud Computing Projected Income Statement First Year of Operations (in thousands)
Sales $400,000
Expenses: Wages and salaries (includes CEO salary of $1,000) $125,000
Bad debt expense 5,000
Depreciation Marketing Expense Occupancy Expense 40,000
50,000
95,500
Research and Development (includes R&D salaries & wages and other R&D expenditures) 80,000
Total Expenses 395,500
Operating income before bonus 4,500
Bonus 225
Operating income 4,275
Interest expense 2,500
Income before taxes 1,775
Income taxes (40%) 710
Net income $ 1,065
Silver Cloud Computing Projected Balance Sheet March 31, 2018 (in thousands)
Assets: Cash $ 5,930
Accounts receivable, net of allowance of 5,000
45,000
Net computer equipment 80,000
Total assets $130,930
Liabilities & Shareholders' Equity: Accounts payable $ 4,865
Long-term debt 50,000
Common stock 75,000
Retained earnings 1,065
Total liabilities and shareholders' equity $130,930
A Chief Executive Officer (CEO) was hired just prior to the commencement of operations. After examining the projections for the first year, the CEO presented the following suggestions to the chief financial officer (CFO).
1. Decrease research and development expenditures from 20% of sales to 10% of sales.
2. Increase the estimated lives of the computer equipment from 3 years to 6 years.
3. Reduce the allowance for doubtful accounts from 10% of accounts receivable to 5% of accounts receivable.
4. Decrease marketing expense from 12.5% of sales to 8% of sales. Additional notes: The CEO’s compensation package at Silver Cloud Computing is a $1,000,000 salary with a cash bonus of 5% of operating income before the bonus. Original depreciation of the computers was calculated using straight-line depreciation over a 3 year period with no salvage value.
I need to discuss the changes and impacts of changes 1 through 4.