Questions:

Prepare the financial statement of cash flows and the accounting statement of cash flows. Also answer the following questions.

1. How would you describe Warf Computers cash flows?

2. Which cash flow statement more accurately describes the cash flows at the company?

3. In light of your previous answers, comment on Nicks expansion plans

CASH FLOW STATEMENTS Warf Computers Prepare the financial statement of cash flows and the accounting statement of cash flows Financial Statement of Cash Flows Items Value ($ '000') Net income 896 Cash flows from operations Depreciation 191 Cash and cash equivalents (47) Inventories 17 Accounts payable 20 Notes payable 6 Accounts Receivable (37) Others 11 Accrued expenses (increase) (118) Cash flows from operations 917 Cash flows from investing Activities Proceeds from sale of equipment 1, 140 Purchase of an equipment (330) 1 CASH FLOW STATEMENTS PPE (increase) (724) Cash flows from investing activities 86 Cash flows from financing Activities Stock (retired) 12 Stock (repurchased) (48) Long term debt (raised) 175 Long term debt (retired) (151) Long term debt (increase) 24 Dividends paid (225) Income from Financing Activities (237) Total Cash flows of Warf Computers 766 Accounting Statement of Cash Flows Items Value ($ '000') Sales 5,813 Cost of goods sold 3,430 Selling and Adm/selling expenses 652 2 CASH FLOW STATEMENTS Depreciation 191 Operating income $1,540 Other income 58 EBIT $1,598 Interest expense 105 Pre-tax income $1,493 Taxes 597 Net income $896 How would you describe Warf Computers cash flows? The cash flows of Warf Computers portrays an entity that is doing well. The highest level of the cash flows that is used in the entity is from the operations activities. This means that the firm is able to sustain its daily operations and it is not relying on external financing or sale of assets. The entity is able to generate income from its internal sources and it is therefore able to source its own income from its daily business transactions. Which cash flow statement more accurately describes the cash flows at the company? The financial statement of cash flows explains more on the position of the firm because it covers all business operations of the firm. This explains the level of the transactions that the firm executes with its partners. Financial statement cash flows explains the ability of the firm to 3 CASH FLOW STATEMENTS sustain its daily operations through the different sources of operations. The accounting cash flow statement only indicates the cash flows that are generates through sales. In light of your previous answers, comment on Nick's expansion plans Nick's expansion plans is viable if only the same level of production is maintained such that the firm is able to service its daily operations through internal income generation. The expansion should be done in such a way that it will not affect the current level of operations of the firm. Debtors needs entities to show the ability of productiveness. Notes Cash flows from operating activities: These items are presented in line items that you will need to fill in to complete a cash flow statement. Cash Flow from Operating Activities: (+) Cash received from customers (+) Other operating cash receipts (if any) (-) Cash paid to suppliers (including suppliers of inventory, insurance, advertising, etc.) (-) Cash paid to employees (-) Interest paid (-) Income taxes paid (-) Other operating payments, if any 4 CASH FLOW STATEMENTS (=) Total Net Cash Provided (Used) by Operating Activities Cash flows from investing activities Cash Flows from Investing Activities: (+) Proceeds from sale of assets (-) Purchases of property and equipment (=) Total Net Cash Provided (Used) by investing activities Cash flows from financing activities (+) Net borrowing under line of credit agreement (+) Proceeds from new borrowings (-) Repayment of loans (-) Principal payments under capital lease obligations (-) Dividends/distributions/withdrawals paid (+) Proceeds from issuance of stock (+) Partner/owner capital contributions (=) Total Net Cash Provided (Used) by financing activities 5 CASH FLOW STATEMENTS References Bodie, Zane; Alex Kane; Alan J. Marcus (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. p. 455. ISBN 0-07-251077-3. Epstein, Barry J.; Eva K. Jermakowicz (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. 91-97. ISBN 978-0-471-79823 Watanabe, Izumi: (2007) The evolution of Income Accounting in Eighteenth and Nineteenth Century Britain, Osaka University of Economics, Vol.57, No. 5, January 2007, p.27-30 6