Question

Cash Flows and Financial Statements at Sunset Boards, Inc. Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and it has a 20 percent tax rate. You are Christina's assistant, and she has asked you to prepare the following: 1. An income statement for 2010 and 2011. 2. A balance sheet for 2010 and 2011. 3. Operating cash flow for each year. 4. Cash flow from assets for 2011. 5. Cash flow to creditors for 2011, 6. Cash flow to stockholders for 2011. 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 com- pany'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 open- ing 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 orga- nized and detailed financial statements than Tad has previ- ously prepared. At the urging of his investors, Tad has hired financial analyst Christina 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, Christina has assembled the fol- lowing information: QUESTIONS 1. How would you describe Sunset Boards' cash flows for 20112 Write a brief discussion. 2. In light of your discussion in the previous question, what do you think about Tad's expansion plans? Visit us at www.mhhe.com/rwj Cost of goods sold Cash Depreciation Interest expense Selling and administrative Accounts payable Net fixed assets Sales Accounts receivable Notes payable Long-term debt Inventory New equity 2010 $ 163,849 23,643 46,255 10,056 32,223 41,786 204,068 321,437 16,753 19,046 103,006 32,255 0 2011 $206,886 35,721 52,282 11,526 42,058 47,325 248,625 391,810 21,732 20,796 116,334 43,381 20,500

Answer 1

1. Preparing Income statement for 2010 and 2011:-

Particular	2010 (Amount in $)	2011 (Amount in $)
Sales	321,437	391,810
Less: COGS	(163,849)	(206,886)
Gross Profit	157,588	184,924
Less: Selling & Admin Exp	(32,223)	(42,058)
Less: Depreciation	(46,255)	(52,282)
Earning Before Interest and Taxes(EBIT)	79,110	90,584
Less: Interest Expenses	(10,056)	(11,526)
Earning before Tax(EBT)	69,054	79058
Less: Tax@20%	(13,811)	(15,812)
Net Income	55,243	63,246
Dividends Paid	27622	31,623
Transfer to Retained earnings	27621	31,623

b). Preparing the Balance Sheet for 2010 & 2011:

Particular	2010 (Amount in $)	2011 (Amount in $)
ASSETS
Cash	23,643	35,721
Accounts Receivables	16,753	21,732
Inventory	32,255	43,381
Net Fixed Assets	204,068	248,625
Total assets	276,719	349,459
LIABILITIES & EQUITIES
Accounts Payable	41,786	47,325
Notes Payable	19,046	20,796
Long Term Debt	103,006	116,334
Equity (Balancing Fig for 2010)	85,260	105760*
Retained Earnings	27,621	59,244**
Total Liabilities & Equities	276,719	349,459

*- Equity for 2011 = 85260+20500 ;= $ 105760

** Retained earnings for 2011 = 27,621+31,623 ;= $59,244

c). Preparing Operating Cash flow for 2010 & 2011:-

Particular	2010 (Amount in $)	2011 (Amount in $)
Net Income	55,243	63,246
Add: Depreciation	46255	52282
Add: Increase in Accounts Payable	41,786	5539
Add: Increase in Notes Payable	19,046	1750
Less: Increase in Accounts Receivables	(16,753)	(4979)
Less: Increase in Inventory	(32,255)	(11126)
Operating Cash Flow	113322	106712

Note- Since, 2010 is initial year Change in working capital from 0.

d). Preparing Cash Flow from Assets for 2011:-

Cash Flow from Assets = Operating Cash Flow - Capital Expenditure

= 31,623 - 96839*

= -$ 65,216

*- Capital Expenditure = Closing Fixed assets - Opening Fixed Assets + Depreciation

= 248625 - 204068 + 52282

= $ 96,839

Note- As per HOMEWORKLIB RULES, I'm only allowed to answer max 4 sub-parts in 1 question so 1-4 has been answered.

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