Question

Please answer questions 1-6

CHAPTER CASE CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC. 2013 2014 $169,969 24,524 47,980 10,442 33,425 $214.607 26,056 54,230 11,954 43,626 Cost of goods sold Cash Depreciation Interest expense Selling & administrative expenses Accounts payable Net fixed assets Sales Accounts receivable Notes payable Long-term debt Inventory New equity 43,344 211,680 333,426 17,378 19,757 106,848 36,570 0 48,090 264,021 406,427 22,542 21,571 119.976 50,185 20,160 Cunset Boards is a small company that manufac- tures 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 fi- nancial records are not well maintained. The initial investment in Sunset Boards was pro- vided 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 inves- tors 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 con- sidering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his "sticks" (surferlingo for boards) to other sellers. Tad's expansion plans require a significant in- vestment, which he plans to finance with a combi- nation of additional funds from outsiders plus some money borrowed from banks. Naturally, the new in- vestors 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 perfor- mance of the company over the past year. After rooting through old bank statements, sales receipts, tax returns, and other records, Paula has as- sembled the following information: Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other origi- nal 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 vou 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?

Answer 1

Requirement 1: Prepare the income statement as follows

SB Inc Amount $406,427 $214.607 $191,820 SB Inc Income Statement For the Year Ended December 31, 2013 Particulars Amount Amount Sales Revenue $333,426 Cost of Goods Sold $169,969 Gross Profit $163,457 Deduct: Operating Expenses Selling and Administrative Expenses | $33,425 | Depreciation Expense $47.980 $81.405 Earnings Before Interest and Tax $82,052 Interest Expense $10.442 Earnings Before Taxes $71.610 Income tax ($71,610 x 20%) $14.322 Net Income $57,288 Income Statement For the Year Ended December 31, 2014 Particulars Amount Sales Revenue Cost of Goods Sold Gross Profit Deduct: Operating Expenses Selling and Administrative Expenses $43,626 Depreciation Expense $54,230 Earnings Before Interest and Tax Interest Expense Earnings Before Taxes Income tax ($82,010 20%) Net Income $97.856 $93.964 $11.954 $82,010 $16,402 $65,608 Notes: Dividends Paid Net income Dividends ($57.288 - 2) Addition to Retained Earnings $57,288 $28,644 $28,644 Notes: Dividends Paid Net income Dividends ($65.608 - 2) Addition to Retained Earnings $65.608 $32,804 $32.804

Requirement 2: Prepare the balance sheet as follows

$26.056 $22,542 $50.185 SB Inc Balance Sheet December 31, 2013 Assets Current Assets Cash $24.524 Accounts Receivable $17,378 Inventory $36.570 Total Current Assets Net Fixed Assets Total Assets Liabilities and Owners' Equity Current Liabilities Accounts Payable $43.344 Notes Payable $19,757 Total current Liabilities Long-term Debt Total Liabilities Owners' Equity Total Liabilities and Owners' Equity $78.472 $211.680 $290.152 SB Inc Balance Sheet December 31, 2014 Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Net Fixed Assets Total Assets Liabilities and Owners' Equity Current Liabilities Accounts Payable Notes Payable Total current Liabilities Long-term Debt Total Liabilities Owners' Equity Total Liabilities and Owners' Equity $98.783 $264.021 $362,804 $48,090 $21.571 $63.101 $106.848 $169.949 $120.203 $290,152 $69,661 $119.976 $189,637 $173.167 $362,804

Note: 2013 Owners' equity = $120,203 (290,152 −169,949)

2014 Owners' equity = $173,167 ($120,203 + $32,804 + $20,160)

Requirement 3: Compute operating cash flows as follows

Operating Cash Flows - 2013				Operating Cash Flows - 2014
Particulars	Amount			Particulars	Amount
Earnings Before Interest and Taxes	$82,052			Earnings Before Interest and Taxes	$93,964
Add: Depreciation Expense	$47,980			Add: Depreciation Expense	$54,230
Deduct: Income Taxes	($14,322)			Deduct: Income Taxes	($16,402)
Operating Cash Flows	$115,710			Operating Cash Flows	$131,792

Requirement 4: Compute cash flows from assets in 2014 as follows

Cash Flow From Assets
Particulars	Amount
Operating Cash Flow	$131,792
Deduct: Net Capital Spending	($106,571)
Deduct: Change in Working Capital	($13,751)
Cash Flow From Assets	$11,470

Notes:

Capital Spending:
Particulars	Amount
Net Fixed Assets - Ending Balance	$264,021
Deduct: Net Fixed Assets - Beginning Balance	($211,680)
Add: Depreciation Expense	$54,230
Net capital spending	$106,571
Change in working Capital:
Particulars	Amount
Ending Net Working Capital ($98,783 − $69,661)	$29,122
Deduct: Beginning Net Working Capital ($78,472 − $63,101)	$15,371
Change in Net Working Capital	$13,751

Requirement 5: Compute cash flows to creditors in 2014 as follows

Particulars	Amount
Interest Paid	$11,954
Deduct: Net new Borrowing ($119,976 − $106,848)	($13,128)
Cash Flow to Creditors	($1,174)

Requirement 6: Compute cash flows to stockholders in 2014 as follows

Particulars	Amount
Dividends paid	$32,804
Deduct: New Equity issued	$20,160
Cash flow to Stockholders'	$12,644