Question

Cash Flows and Financial Statements at Sunset Boards, Inc.

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 company’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 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 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 organized and detailed financial statements than Tad has previously 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 following information:

	2014	2015
Cost of goods sold	$ 196,619	$ 248,263
Cash	28,372	42,865
Depreciation	55,506	62,738
Interest expense	12,067	13,831
Selling and administrative	38,668	50,469
Accounts payable	20,143	34,091
Net fixed assets	244,881	298,350
Sales	385,724	470,172
Accounts receivable	20,104	26,078
Notes payable	22,855	24,955
Long-term debt	123,607	140,000
Inventory	38,706	52,057
New equity	0	15,000

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 30 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2014 and 2015.

2. A balance sheet for 2014 and 2015.

3. Operating cash flow for each year.

4. Cash flow from assets for 2015.

5. Cash flow to creditors for 2015.

6. Cash flow to stockholders for 2015.

QUESTIONS

How would you describe Sunset Boards’ cash flows for 2015? Write a brief discussion.

In light of your discussion in the previous question, what do you think about Tad’s expansion plans?

Answer 1

1)
INCOME STATEMENT	2014	2015
sales	385724	470172
less: cogs	196619	248263
gross profit	189105	221909
Less: selling and admn exps:
selling and admn exps	38668	50469
depreciation	55506	62738
operating profit	94931	108702
interest expense	12067	13831
EBT	82864	94871
income tax @ 30%	24859	28461
Net income	58005	66410
Dividends (40%)	23202	26564
2)
BALANCE SHEET	2014		2015
ASSETS:
Currrent assets:
cash	28372		42865
accounts receiveble	20104		26078
inventory	38706	87182	52057	121000
net fixed assets		244881		298350
TOTAL ASSETS		332063		419350
LIABILITIES & EQUITY:
Current liabilities:
accounts payable	20143		34091
notes payable	22855	42998	24955	59046
Long term debt		123607		140000
Total liabilities		166605		199046
Equity:
Equity	130655		145655
Retained earnings	34803	165458	74649	220304
		332063		419350
3) Operating cash flow:
EBIT + Depreciation-taxes		125578		142979
4) Cash flow from assets				9002
(Operating cash flow - capital spending -additions to NWC)
Capital spending:				116207
(Ending net fixed assets-beginning fixed assets + depreciation(
Additions to NWC				17770
(Ending NWC - Beginning NWC)
5) Cash flow to creditors				-2562
(interest expense-ending long term debt+beginning long term debt)
6) Cash flow to stock holders				11564
(dividends paid-ending common stock+beginning common stock
The firms cash flow from assets is positive indicating that the cash flow from operations is sufficient to cover the
capital spending and the additional investment in NWC and leaving a balance of $9002.
The firm has also been able to provide positive cash flow to stock holders.