Question

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 company’s 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 haven’t 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.

Tad’s 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 Christina’s 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.

7. What are the limitations of financial statements?

Answer 1

1.

Income Statement
	2017	2018
Sales	$           5,01,441	$         6,11,224
Cost of Goods Sold	$           2,55,605	$         3,22,742
Gross Profit	$          2,45,836	$        2,88,482
Depreciation	$              72,158	$            81,559
Selling and administrative exp	$              50,268	$            65,610
Operating Income	$          1,23,410	$        1,41,313
Interest Expense	$              15,687	$            17,980
Income before tax	$          1,07,723	$        1,23,333
Income tax @ 21%	$              22,622	$            25,900
Net Income	$              85,101	$            97,433
Dividend 40%	$              34,040	$            38,973
Transfer to Retained Earnings	$              51,061	$            58,460

2. Balance Sheet

Balance Sheet
	2017	2018
Assets
Current Assets
Cash	$              36,884	$            55,725
Accounts Receivable	$              26,136	$            33,901
Inventory	$              50,318	$            67,674
Total Current Assets	$           1,13,338	$         1,57,300
Fixed Assets	$           3,18,345	$         3,87,855
Total Assets	$           4,31,683	$         5,45,155
Liabilities & Owner's Equity
Current Liabilities
Accounts Payable	$              26,186	$            44,318
Notes Payable	$              29,712	$            32,441
Total Current Liabilities	$              55,898	$            76,759
Long term Liabilities
Long term Debt	$           1,60,689	$         1,75,340
Total Liabilities	$           2,16,587	$         2,52,099
Owner's Equity
Shareholder's Equity	$           1,64,035	$         2,15,096
New Equity		$            19,500
Retained Earnings	$              51,061	$            58,460
Total Owner's Equity	$           2,15,096	$         2,93,056
Total Liabilities & Owner's Equity	$           4,31,683	$         5,45,155

Shareholder's Equity is balancing figure, with Total Assets = Total Liabilities & Owner's Equity

3.

Operating cash flow
	2017	2018
Operating Income	$           1,23,410	$         1,41,313
Depreciation	$              72,158	$            81,559
Taxes	$            -22,622	$           -25,900
Total	$           1,72,946	$         1,96,972

4.

Cash Flow from Assets
	2018
Operating Cash flow	$           1,96,972
Change in Current Assets & Liabilities
Increase in Accounts Receivable	$               -7,765
Increase in Inventory	$            -17,356
Increase in Accounts Payable	$              18,132
Increase in Notes Payable	$                2,729
Change in Fixed Assets	$         -1,51,069
Total	$              41,643

Change in Fixed assets = Beginning Balance - Depreciation 2018 - Ending Balance

5. Cash Flow to Creditors = Beginning Balance of Long term Debt - Ending Balance + Interest 2018
= $160689 - $175340 + $17980 = $3329

6. Cash Flow to Stockholders = Dividend Paid = $38973