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 sheet for the two most recent years and the most recent income statement:

Mini Case WARF COMPUTERS Balance Sheet

($ in thousands)

Current assets Cash and equivalents Accounts receivable Inventories Other Total current assets Fixed assets Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and others Total fixed assets Total assets 2012

$ 348 551 493 71

$1,463

$3,191 1,031

$2,160 610

$2,770

$4,233 2011

$ 301 514 510 60

$1,385

$2,446 840

$1,606 545

$2,151

$3,536 Current liabilities Accounts payable Notes payable Accrued expenses Total current liabilities Long-term liabilities Deferred taxes Long-term debt Total long-term liabilities Stockholders’ equity Preferred stock Common stock Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders’ equity 2012

$ 314 85 190

$ 589

$ 254 907

$1,161

$ 16 97 611 1,904 145

$2,483

$4,233 2011

$ 294 79 308

$ 681

$ 124 883

$1,007

$ 16 97 599 1,233 97

$1,848

$3,536