FIN-31 Chapter 2

MINICASE

CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC.

Sunset Boards 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 companys 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 havent 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.

Tads 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 Wolfe 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:

	2017	2018
Cost of goods sold	$ 255,605	$ 322,742
Cash	36,884	55,725
Depreciation	72,158	81,559
Interest expense	15,687	17,980
Selling and administrative	50,268	65,610
Accounts payable	26,186	44,318
Net fixed assets	318,345	387,855
Sales	501,441	611,224
Accounts receivable	26,136	33,901
Notes payable	29,712	32,441
Long-term debt	160,689	175,340
Inventory	50,318	67,674
New equity	0	19,500

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christinas assistant, and she has asked you to prepare the following:

1. An income statement for 2017 and 2018.
2. A balance sheet for 2017 and 2018.
3. Operating cash flow for each year.
4. Cash flow from assets for 2018.
5. Cash flow to creditors for 2018.
6. Cash flow to stockholders for 2018.

REQUIREMENTS, SANSWER THE 2 QUESTIONS

1. How would you describe Sunset Boards cash flows for 2018? Write a brief discussion.
2. In light of your discussion in the previous question, what do you think about Tads expansion plans?