Cash Flows at Warf Computers; 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.

Cash Flows at Warf Computers

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: Cash Flows at Warf Computers

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Balance Sheets ($ in thousands)
Current assetsCurrent liabilities
Cash and equivalents$   469$   542Accounts payable$   582$   623
Accounts receivable802859Accrued expenses     481     296
Inventories795769Total current liabilities$1,063$   919
Other       94     110Long-term liabilities
Total current assets$2,160$2,280Deferred taxes$   191$   257
Fixed assetsLong-term debt  1,379  1,415
Property, plant, and equipment$3,815$4,978Total long-term liabilities$1,570$1,672
Less accumulated depreciation  1,310  1,608Stockholders’ equity
Net property, plant, and equipment$2,505$3,370Preferred stock$     25$     25
Intangible assets and others     851     953Common stock151155
Total fixed assets$3,356$4,322Capital surplus934949
Accumulated retained earnings1,9243,112
Less treasury stock     151     230
Total equity$2,883$4,011
Total assets$5,516$6,602Total liabilities and shareholders’ equity$5,516$6,602


Income Statement
($ in thousands)


Cost of goods sold

Selling, general, and administrative expense


Operating income

Other income


Interest expense

Pretax income


Current: $559

Deferred: $66

Net income


Retained earnings














$   688


Nick 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. Cash Flows at Warf Computers

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 cash flow statement more accurately describes the cash flows at the company?

In light of your previous answers, comment on Nick’s expansion plans

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