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CHAPTER CASE

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 Paula 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, Paula has assembled the following information:

2013	2014
Cost of goods sold	$169,969	214,607
Cash	24,524	26,056
Depreciation	47,980	54,230
Interest expense	10,442	11,954
Selling & administrative expenses	33,425	43,626
Accounts payable	43,344	48,090
Net fixed assets	211,680	264,021
Sales	333,426	406,427
Accounts receivable	17,378	22,542
Notes payable	19,757	21,571
Long-term debt	106,848	119,976
Inventory	36,570	50,185
New equity	0	20,160

Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and has a 20 percent tax rate. You are Paulas assistant, and she has asked you to prepare the following:

1. An income statement for 2013 and 2014.

2. A balance sheet for 2013 and 2014.

3. Operating cash flow for each year.

4. Cash flow from assets for 2014.

5. Cash flow to creditors for 2014.

6. Cash flow to stockholders for 2014.

QUESTIONS

1.How would you describe Sunset Boards cash flows for 2014? Write a brief discussion.

2.In light of your discussion in the previous question, what do you think about Tads expansion plans?

¹The termsowners equity, shareholders equity, andstockholders equityare used interchangeably to refer to the equity in a corporation. The termnet worthis also used. Variations exist in addition to these.

²By straight-line, we mean that the depreciation deduction is the same every year. By written down to zero, we mean that the asset is assumed to have no value at the end of five years.