Question details

Cash Flows and Financial Statements at Sunset Boards, Inc
$ 10.00

CHAPTER CASE

CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC.

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.

The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Paula Wolfe to evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Paula has assembled the following information:

2013       2014

Cost of goods sold           $169,969                214,607

Cash          24,524                   26,056

Depreciation          47,980                   54,230

Interest expense                 10,442                   11,954

Selling & administrative expenses                33,425                   43,626

Accounts payable                43,344                   48,090

Net fixed assets                  211,680                 264,021

Sales         333,426                 406,427

Accounts receivable            17,378                  22,542

Notes payable        19,757                  21,571

Long-term debt                   106,848                119,976

Inventory                 36,570                 50,185

New equity                      0                   20,160

Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and has a 20 percent tax rate. You are Paula’s assistant, and she has asked you to prepare the following:

1. An income statement for 2013 and 2014.

2. A balance sheet for 2013 and 2014.

3. Operating cash flow for each year.

4. Cash flow from assets for 2014.

5. Cash flow to creditors for 2014.

6. Cash flow to stockholders for 2014.

QUESTIONS

1.How would you describe Sunset Boards’ cash flows for 2014? Write a brief discussion.

2.In light of your discussion in the previous question, what do you think about Tad’s expansion plans?

1 The terms owners’ equity, shareholders’ equity, and stockholders’ equity are used interchangeably to refer to the equity in a corporation. The term net worth is also used. Variations exist in addition to these.

2 By “straight-line,” we mean that the depreciation deduction is the same every year. By “written down to zero,” we mean that the asset is assumed to have no value at the end of five years.

Available solutions