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.
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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| WARF COMPUTERS Balance Sheets ($ in thousands) | ||||||||
| 2018 | 2019 | 2018 | 2019 | |||||
| Current assets | Current liabilities | |||||||
| Cash and equivalents | $ 469 | $ 542 | Accounts payable | $ 582 | $ 623 | |||
| Accounts receivable | 802 | 859 | Accrued expenses | 481 | 296 | |||
| Inventories | 795 | 769 | Total current liabilities | $1,063 | $ 919 | |||
| Other | 94 | 110 | Long-term liabilities | |||||
| Total current assets | $2,160 | $2,280 | Deferred taxes | $ 191 | $ 257 | |||
| Fixed assets | Long-term debt | 1,379 | 1,415 | |||||
| Property, plant, and equipment | $3,815 | $4,978 | Total long-term liabilities | $1,570 | $1,672 | |||
| Less accumulated depreciation | 1,310 | 1,608 | Stockholders’ equity | |||||
| Net property, plant, and equipment | $2,505 | $3,370 | Preferred stock | $ 25 | $ 25 | |||
| Intangible assets and others | 851 | 953 | Common stock | 151 | 155 | |||
| Total fixed assets | $3,356 | $4,322 | Capital surplus | 934 | 949 | |||
| Accumulated retained earnings | 1,924 | 3,112 | ||||||
| Less treasury stock | 151 | 230 | ||||||
| Total equity | $2,883 | $4,011 | ||||||
| Total assets | $5,516 | $6,602 | Total liabilities and shareholders’ equity | $5,516 | $6,602 | |||
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WARF COMPUTERS | ||||||||
| Sales Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income EBIT Interest expense Pretax income Taxes Current: $559 Deferred: $66 Net income Dividends Retained earnings | $9,068 5,347 848 298 $2,575 90 $2,665 164 $2,501 625
$1,876 $ 688 $1,188 | |||||||
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:
- How would you describe Warf Computers’s cash flows?
- 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