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 vir- tual 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 gen- eration beyond what is currently on the market. To introduce the VK, the company will require significant outside investment. Nick has made the decision to seck 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: 2007 2006 $ 263 $ 197 205 $ 457 455 WARF COMPUTERS Balance Sheet ($ in thousands) 2007 2006 Current assets: Current liabilities: Cash and equivalents $ 232 $ 201 Accounts payable Accounts receivable 367 342 Notes payable Inventories 329 340 Accrued expenses Other 47 40 Total current Total current assets $975 $923 liabilities Fixed assets: Long-term liabilities: Property, plant, and $2,105 $1,630 Deferred taxes equipment Long-term debt Less accumulated 687 560 Total long-term depreciation liabilities Net property, plant, and $1.418 $1.070 Stockholders' equity: equipment Preferred stock Intangible assets and others 406 363 Common stock Total fixed assets $1.824 $1,433 Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and Total assets $2.799 $2.356 shareholders' equity $m ss $ 10 1.147 822 -97 $1.570 $2.799 $2.356 Nick has also provided the following information: During the year the company raised $94,000 in new long-term debt and retired S54,000 in long-term debt. The company also sold $47,000 in new stock and repurchased $32,000 in stock. The company purchased $629.000 in fixed assets and sold S111,000 in fixed assets. WARF COMPUTERS Income Statement ($ in thousands) $3,875 2,286 434 127 $1,028 38 $1,066 Sales Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income Earnings before interest and taxes (EBIT) Interest expense Pretax income Taxes Current: $286 Deferred: 61 Net income Addition to retained earnings Dividends 76 $ 990 347 $ 643 $ 325 $ 318 Angus has asked you to prepare the financial statement of cash flows and the accounting statement of cash flows. He has also asked you to answer the following questions: 1. How would you describe Warf Computers' cash flows? 2. Which cash flow statement more accurately describes the cash flows at the company? 3. In light of your previous answers, comment on Nick's expansion plans