CASH FLOWS AT WARF COMPUTERS, INC.

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: