Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small

initial investment to start the company was made by Nick and his friends. Over the years, this same

group has supplied the limited additional investment needed by the company in the form of both

equity and short- and long-term debt. Recently the company has developed a virtual keyboard (VK).

The VK uses sophisticated artificial intelligence algorithms that allow the user to speak naturally

and have the computer input the text, correct spelling and grammatical errors, and format the

document according to preset user guidelines. The VK even suggests alternative phrasing and sentence structure, and it provides detailed stylistic diagnostics. Based on a proprietary, very advanced

software/hardware hybrid technology, the system is a full generation beyond what is currently on

the market. To introduce the VK, the company will require significant outside investment.

Nick has made the decision to seek this outside financing in the form of new equity

investments and bank loans. Naturally, new investors and the banks will require a detailed

financial analysis. Your employer, Angus Jones & Partners, LLC, has asked you to examine

the financial statements provided by Nick. Here are the balance sheets for the two most recent

years and the most recent income statement: