Question

WARF COMPUTERS Balance Sheets (sin thousands) Equity 2019 Ratio $ 542 859 769 110 $2280 Other 2018 Current assets Cash and equivalents $469 Accounts receivable BO2 Inventories 795 94 Total current assets $2,160 Fixed assets Property, plant, and equipment $ 3,815 Less accumulated depreciation 1,310 Net property, plant and equipment $2,505 Intangible assets and others 851 Total feed assets $3.356 $4,978 2011 2019 Current liabilities Accounts payable $ 582 $ 623 Accrued expenses 481 296 Total current llabilities $ 1,063 $ 929 Long-term Babies Deferred taxes $ 191 $ 257 Long-term debt 1379 1.415 Total long-term liabilities $ 1,570 $ 1672 Stockholders' equity Preferred stock $ 25 $ 25 Common stock 151 155 Capital surplus 934 949 Accumulated retained 1,924 3.112 earnings Less treasury stock 151 230 Total equity $2 883 $4.011 1.608 $3,370 18 953 $4.322 Total Salibes and shareholders' equity $ 5,516 $6,602 $5.516 $6,602 Total assets WARF COMPORE Income Statement is in $9.068 5.347 848 298 Sales Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other Income 1953 IsofEs Interest expense Pretax income Taxes Current: $559 Deferred$66 Net income Dividends Retained earnings $2,575 $2,665 $2,501 625 $ 1,876 $ 688 $ 1,188 NK also has provided the following information: During the year the company raised $274,000 in new long-term debt and retired $238,000 in long-term debt. The company also sold $19.000 in new stock and repurchased $79,000 in stock. The company purchased $1,778,000 in fixed assets and sold $514,000 in fixed assets. Angus has asked you to prepare the financial statement of cash flows and the accounting statement of cash flows. He also has asked you to answer the following questions: 1. How would you describe Warf Computers's cash flows? 2. Which Which cash flow statement more accurately describes the cash flow at the company? 3. In light In light of your previous answers, comment on Nick's expansion plans.

Answer 1

CASH FLOWS AT WARF COMPUTERS
	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.