49 CHAPTER 2 Financial Statements, Taxes, and Cash Flow CHAPTER CASE Cash Flows and Financial Statements at Sunset Boards, Inc. Cunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the 2018 2019 founder of the company, is in charge of the design and Cost of goods sold $224,359 $283,281 sale of the surfboards, but his background is in surfing, 32,372 34,394 not business. As a result, the company's financial Cash 71,584 records are not well maintained. Depreciation 63,334 Interest expense 13,783 15,780 The initial investment in Sunset Boards was pro- Selling and administrative 44, 121 57,586 vided by Tad and his friends and family. Because the ini- expenses Accounts payable 63,479 tial investment was relatively small, and the company 57,220 279,419 has made surfboards only for its own store, the investors Net fixed assets 348,508 440, 122 haven't required detailed financial statements from Tad. Sales 536,483 Accounts receivable 22,939 29,755 But thanks to word of mouth among professional surf- Notes payable 26,079 28,474 ers, sales have picked up recently, and Tad is consider- Long-term debt 141,040 158,368 ing a major expansion. His plans include opening Inventory 48,272 66,244 another surfboard store in Hawaii, as well as supplying New equity 27, 157 his "sticks" (surfer lingo for boards) to other sellers. Tad's expansion plans require a significant invest- Sunset Boards currently pays out 50 percent of net ment, which he plans to finance with a combination of income as dividends to Tad and the other original inves- additional funds from outsiders plus some money bor- tors and has a 21 percent tax rate. You are Jameson's rowed from banks. Naturally, the new investors and assistant, and he has asked you to prepare the creditors require more organized and detailed financial following: statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst 1. An income statement for 2018 and 2019. Jameson Reid to evaluate the performance of the com- 2 . A balance sheet for 2018 and 2019. pany over the past year. 3 . Operating cash flow for each year. After rooting through old bank statements, sales re- 4. Cash flow from assets for 2019. ceipts, tax returns, and other records, Jameson has as- 5 . sembled the following information: Cash flow to creditors for 2019. 6. Cash flow to stockholders for 2019. QUESTIONS 1. How would you describe Sunset Boards's cash flows for 2019? Write a brief discussion. 2. In light of your discussion in the previous question, what do you think about Tad's expansion plans