Chapter 2 Mini Case 1 Cash Flows and Financial Statements at Sunset Boards Sunset Boards is a small company that manufactures and sells surfboards in Cape Town. Sipho, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company's financial records are not well maintained. The initial investment in Sunset Boards was provided by Sipho and his friends and family. Since the initial investment was relatively small, and the company has only made surfboards for its own store, the investors haven't required detailed financial statements from Sipho. But, thanks to word of mouth among professional surfers, sales have picked up recently, and Sipho is considering a major expansion. His plans include opening another surfboard shop in Knysna, as well as supplying other sellers. Sipho's expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and lenders require more organized and detailed financial statements than Sipho has previously prepared. At the urging of his investors, Sipho has hired a financial analyst to evaluate the performance of the company over the past year After rooting through old bank statements, sales receipts, tax returns and other records, the analyst has assembled the following information: 2007 84 310 12 165 23 800 5 180 16 580 21 500 105 000 165 390 8 620 9 800 53 000 18 140 2008 106 4SO 18 380 26 900 5930 21 640 24 350 134 000 210 600 11 182 10 700 61 000 24 894 10000 Cost of goods sold Cash Interest expense Selling and administrative expenses Accounts payable Non-current assets Sales Accounts receivable Bank overdraft Long-term debt Inventory New Sunset Boards currently pays out 30 per cent of net profit after tax as dividends to Sipho and the other original investors, and has asked you to prepare the following 1. An income statement and balance sheet for 2007 and 2008 2. Operating cash flow for cach year 3. Cash flow from assets for 2008 4. Cash flow to lenders and cash flow to shareholders for 2008. Questions 1. How would you describe Sunset Boards' cash flows for 2008? Write up a brief discussion 2. In light of your discussion in the previous question, what do you think about Sipho's expansion plans