CASH FLOWS AT EAST COAST YACHTS

Because of the dramatic growth at East Coast Yachts, Larissa decided that the company should be reorganized as a corporation. Time has passed and, today, the company is publicly traded under the ticker symbol ECY.

Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the companys financial performance. Dan graduated from college five years ago with a finance degree, and he has been employed in the treasury department of a Fortune 500 company since then.

EAST COAST YACHTS 2017 Income Statement
Sales	$611,582,000
Cost of goods sold	431,006,000
Selling, general, and administrative	73,085,700
Depreciation	19,958,400
EBIT	$ 87,531,900
Interest expense	11,000,900
EBT	$ 76,531,000
Taxes	30,612,400
Net income	$ 45,918,600
Dividends	17,374,500
Retained earnings	$ 28,544,100

The companys past growth has been somewhat hectic, in part due to poor planning. In anticipation of future growth, Larissa has asked Dan to analyze the companys cash flows. The companys financial statements are prepared by an outside auditor. Nearby you will find the most recent income statement and the balance sheets for the past two years.

Larissa has also provided the following information. During the year, the company raised $40 million in new long-term debt and retired $22.6 million in long-term debt. The company also sold $24.2 million in new stock and repurchased $35.64 million. The company purchased $59.5 million in fixed assets, and sold $6,718,200 in fixed assets.

Larissa has asked Dan to prepare the financial statement of cash flows and the accounting statement of cash flows. She has also asked you to answer the following questions:

1. How would you describe East Coast Yachts cash flows?

2. Which cash flows statement more accurately describes the cash flows at the company?

3. In light of your previous answers, comment on Larissas expansion plans.

1. ¹ Bondholders are investors in the firms debt. They are creditors of the firm. In this discussion, the term bondholder means the same thing as creditor.

2. ² Confusion often arises because many financial accounting terms have the same meaning. This presents a problem with jargon for the reader of financial statements. For example, the following terms usually refer to the same thing: assets minus liabilities, net worth, stockholders equity, owners equity, book equity, and equity capitalization.

3. ³ Generally, GAAP requires assets to be carried at the lower of cost or market value. In most instances, cost is lower than market value. However, in some cases when a fair market value can be readily determined, the assets have their value adjusted to the fair market value.

4. ⁴ One situation in which taxable income may be lower than accounting income is when the firm uses accelerated depreciation expense procedures for the IRS but uses straight-line procedures allowed by GAAP for reporting purposes.

5. ⁵ A firms current liabilities sometimes include short-term interest-bearing debt usually referred to as notes payable. However, financial analysts often distinguish between interest-bearing short-term debt and non-interest-bearing short-term debt (such as accounts payable). When this distinction is made, only non-interest-bearing short-term debt is usually included in the calculation of net working capital. This version of net working capital is called operating net working capital. The interest-bearing short-term debt is not forgotten but instead is included in cash flow from financing activities, and the interest is considered a return on capital.

6. ⁶ New debt and the retirement of old debt are usually found in the notes to the balance sheet.