Question

The Warf Mini Case requires you to complete 2 Cash Flows. The Financial Cash Flow from the 3 sources, OCF, Cap Ex, and change in WC, is $876 which goes to Debt or Equity holders. The Accounting Cash Flow Statement is try to get to a change in Cash of $73. The 3 sources, Cash Flow from Operations, Investing Activity, and Financing Activity is $73.  

Mini Case Cash Flows at Warf Computers, Inc. Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial investment to start the company was made by Nick and his friends. Over the years, this same group has supplied the limited additional investment needed by the company in the form of both equity and short- and long-term debt. Recently the company has developed a virtual keyboard (VK). The VK uses sophisticated artificial intelligence algorithms that allow the user to speak naturally and have the computer input the text, correct spelling and grammatical errors, and format the document according to preset user guidelines. The VK even suggests alternative phrasing and sentence structure, and it provides detailed stylistic diagnostics. Based on a proprietary, very advanced software/hardware hybrid technology, the system is a full generation beyond what is currently on the market. To introduce the VK, the company will require significant outside investment. Nick has made the decision to seek this outside financing in the form of new equity investments and bank loans. Naturally, new investors and the banks will require a detailed financial analysis. Your employer, Angus Jones & Partners, LLC, has asked you to examine the financial statements provided by Nick. Here are the balance sheets for the two most recent years and the most recent income statement:

Answer 1

	Amount in thousands
The operating cash flow for the company is:
OCF = EBIT + Depreciation – Current taxes
OCF = $2,665 + 298 – 559	$     2,404.00
Capital spending
Ending net fixed assets	$     4,322.00
– Beginning net fixed assets	$   (3,356.00)
+ Depreciation	$        298.00
Net capital spending	$     1,264.00
Change in net working capital
Ending NWC (2280 - 919)	$     1,361.00
– Beginning NWC (2160 - 1063)	$   (1,097.00)
Change in NWC	$        264.00
Cash flow from assets
Operating cash flow	$     2,404.00
– Net capital spending	$   (1,264.00)
– Change in NWC	$      (264.00)
Cash flow from assets	$        876.00
Cash flow to creditors
Interest paid	$164
– Net New Borrowing (274,000 - 238,000)	$        (36.00)
Cash flow to Creditors	$128
Cash flow to stockholders
Dividends paid	$688
– Net new equity raised (79-19)	$        (60.00)
Cash flow to Stockholders	$628
Statement of Cash Flows
Operations
Net income	$     1,876.00
Depreciation	$        298.00
Deferred taxes	$          66.00
Changes in assets and liabilities
Accounts receivable (802-859)	$        (57.00)
Inventories (795-769)	$          26.00
Accounts payable (623 -582)	$          41.00
Accrued expenses (481 -296)	$      (185.00)
Other (94-110)	$        (16.00)
Total cash flow from operations	$     2,049.00
Investing activities
Acquisition of fixed assets	$   (1,778.00)
Sale of fixed assets	$        514.00
Total cash flow from investing activities	$   (1,264.00)
Financing activities
Retirement of debt	$      (238.00)
Proceeds of long-term debt	$        274.00
Dividends	$      (688.00)
Repurchase of stock	$        (79.00)
Proceeds from new stock issues	$          19.00
Total cash flow from financing activities	$      (712.00)
Change in cash (on balance sheet)	$          73.00
a) The firm had positive earnings and had positive cash flow from operations and a positive cash flow from assets. The firm invested $264 in new net working capital and $1,264 in new fixed assets. The firm was able to return $628 to its stockholders and $128 to creditors.
b) The financial cash flows present a more accurate picture of the company since it accurately reflects interest cash flows as a financing decision rather than an operating decision.
c) The expansion plans look like they are probably a good idea. The company was able to return a significant amount of cash to its shareholders during the year, but a better use of these cash flows may have been to retain them for the expansion.