Question

CHAPTER 2 Financial Statements, Taxes, and Cash Flow CHAPTER CASE Cash Flows and Financial Statements at Sunset Boards, Inc. 2018 2019 $224,359 $283,281 32,372 34,394 63,334 71,584 13,783 15,780 44,121 57,586 unset 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 pro- vided by Tad and his friends and family. Because the ini- tial 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 surf- ers, sales have picked up recently, and Tad is consider- ing 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 invest- ment, which he plans to finance with a combination of additional funds from outsiders plus some money bor- rowed 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 Jameson Reid to evaluate the performance of the com- pany over the past year. After rooting through old bank statements, sales re- ceipts, tax returns, and other records, Jameson has as- sembled the following information: Cost of goods sold Cash Depreciation Interest expense Selling and administrative expenses Accounts payable Net fixed assets Sales Accounts receivable Notes payable Long-term debt Inventory New equity 57,220 279,419 440,122 22,939 26,079 141,040 48,272 0 63,479 348,508 536,483 29,755 28,474 158,368 66,244 27,157 Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original inves- tors and has a 21 percent tax rate. You are Jameson's assistant, and he has asked you to prepare the following: 1. An income statement for 2018 and 2019. 2. A balance sheet for 2018 and 2019. 3. Operating cash flow for each year. 4. Cash flow from assets for 2019. 5. Cash flow to creditors for 2019. 6. Cash flow to stockholders for 2019. QUESTIONS 1. How would you describe Sunset Boards's cash flows for 2019? 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

Solution:-

SUNSET BOARD INCOME STATEMENT
	2018	2019
Sales	440,122	536,483
Less:- Cost of Goods Sold	-224,359	-283,281
Gross Profit	215,763	253,202
Expenses :
Selling and Adminstration Expense	-44,121	-57,586
Depreciation	-63,334	-71,584
Total Expenses	-107,455	-129,170
Operatig Income	108,308	124,032
Less:- Interest Expense	-13,783	-15,780
Income Before Taxes	94,525	108,252
Less : Income Tax @ 21%	-19,850.25	-22,732.50
Net Income	74,674.75	85,519.50