Deep Water Experts is the largest retailer of diving equipment for professional and recreational divers in the UAE. The company was founded in 2005 as a joint partnership and has experienced tremendous growth in its short history. The company’s headquarter is in Dubai with branches in Abu Dhabi and Ras Al Khaimah, and the recently added Dhibba branch, its only location on the East coast. The company’s founders, Marc Fabian and Ali Bin Hamdan chose Dubai because of its large expat community and the city’s geographic location. With the Arabian Gulf and its famous ship wrecks at its doorstep and the Indian Ocean with its abundant marine life only an hour and a half drives away, scuba diving has become a major past time in the UAE for residents and tourists alike. Marc and Ali are passionate divers themselves. They have always dreamt of running a business that allows them to combine work and fun. While financially successful, substantial investments were required to facilitate the company’s growth. Over time, Marc and Ali have asked several close friends and one family member to join their company as silent partners, making significant equity contributions. In addition, the company has obtained a short-term credit line from a local bank that also provides long-term credit at an interest rate of 8 percent.

2013	2014
Accounts payable	Dh1865	Dh2310
Sales	50,000	55,000
Inventory	?	3,998
Long-term debt	?	21,655
Cogs	33,500	37,185
Cash	3,236	5,712
Current liabilities	2,988	3,660
Total assets	42,923	50,630
SG&A	7,500	8,250
Current assets	7,973	?
Total debt	17,923	25,315
Depreciation	3,495	3,857
Notes payable	1,123	1,350
Accounts receivables	2,139	2,355
Equity	22,517	?
interest paid on LTD @8%	1,195	?
Net fixed assets	?	38565
RE	2,483	4,773
Dividends	621	?
Addition to Retained Earnings	2,483	?

Marc and Ali are driven by the desire to first expand into Saudi Arabia, to enter the Red Sea diving market, and eventually be present in all neighboring countries of the Gulf. Obviously, the cash flow implications would be substantial. They have hired you to advise them on the current status of the company’s cash flows. Unfortunately, the company’s financial records are not well maintained with several items missing. After rooting through old bank statements, sales receipts, tax returns, and other records, you have assembled the information in the table above.

Marc also informed you that he is an American citizen. As a consequence, the income of the partnership is regarded as personal income as taxed accordingly by the US tax authority, the IRS, even though the UAE currently does not levy income taxes on this type of business. You decided to assume a marginal tax rate of 28 percent for your calculations. Ali also informed you, that they would like to continue to pay 20 percent of the company’s net income to its partners in form of dividends.

QUESTIONS

1. Create an income statement for 2013 and 2014.

2. Create a balance sheet for 2013 and 2014.

3. Determine the operating cash flow for both years.

4. Compute the cash flow from assets for 2014.

5. Compute the cash flow to creditors for 2014.

6. Compute the cash flow to shareholders for 2014.

7. State the cash flow equation for 2014.

8. Interpret your cash flow analysis and state your main findings. Do you think the company’s expansion plans are realistic?