$*$

Chapter

$2$

$$Mini

$-$

Case: Cash Flows and Financial Statements at Sunset Boards, Inc.

$-$

$$Prepare the

$6$

$$financial items requested by Christina Wolfe, and use the information to answer Questions

$1$

$$&

$2$

$.$

$*$

$$Cash Flows and Financial Statements at Sunset Boards, Inc.

Sunset Boards, Inc., is a small company that manufactures and sells surfboards in Malibu. Tad Marks, 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 Tad and his friends and family. Because the initial investment was relatively

small, and the company has made surfboards only for its own store, the investors haven't required detailed financial statements from

Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion.

His plans include opening another surfboard store in Hawaii, as well as supplying his "sticks"

$($

surfer lingo for boards

$)$

$$to other sellers.

Tad'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 creditors require more organized and detailed financial

statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Jennings to

evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following

information:

Sunset Boards currently pays out

$4$

$0$

$$percent of net income as dividends to Tad and the other original investors, and it has a

$2$

$1$

$$percent

tax rate. You are Christina's assistant, and she has asked you to prepare the following:

An income statement for

$2$

$0$

$2$

$0$

$$and

$2$

$0$

$2$

$1$

$.$

A balance sheet for

$2$

$0$

$2$

$0$

$$and

$2$

$0$

$2$

$1$

$.$

Operating cash flow for each year.

Cash flow from assets for

$2$

$0$

$2$

$1$

$.$

Cash flow to creditors for

$2$

$0$

$2$

$1$

$.$

Cash flow to stockholders for

$2$

$0$

$2$

$1$

$.$

QUESTIONS

How would you describe Sunset Boards's cash flows for

$2$

$0$

$2$

$1$

$?$

$$Write a brief discussion.

In light of your discussion in the previous question, what do you think about Tad's expansion plans?