Question

Silver Cloud Computing is a company that provides cloud computing services. The company commenced operations on March 1, 2016. It acquired financing from the issuance of common stock for $40,000,000 and issuance of 4% bonds that mature in 2026 for $30,000,000. The income statements and balance sheets for the first two years are provided in a separate Excel spreadsheet. All amounts are in thousands.

           

Required:

The Chief Executive Officer (CEO) is interested in increasing sales and decreasing expenses. You have been requested to prepare a report that provides analysis of the financial statements and recommendations to improve the financial performance of the company. Your report should include the following items:

A. The company was the victim of a cyber attack. It is not yet known the extent of information that was obtained. The company may be subject to lawsuits as a result of the security breach. Discuss the impacts this may have on the company’s financial statements.

B. The CEO would like to pay dividends to the stockholders. Should the company pay dividends to the shareholders and how would this impact the company’s financial statements?

SILVER CLOUD COMPUTING

Income Statements

For the Years Ended February 28, 2018 and 2017

fye 2/28/2018 fye 2/28/2017

(in thousands) (in thousands)

Sales $225,000 $200,000

Sales Discounts 3,375 2,500

Net Sales 221,625 197,500

Wages and Salaries 73,500 70,000

Bad Debt Expense 2,100 2,000

Depreciation 20,000 20,000

Marketing Expense 33,750 30,000

Occupancy Expense 54,000 54,000

Research & Development 22,500 20,000

Total Expenses 205,850 196,000

Income from Operations 15,775 1,500

Interest Expense 1,200 1,200

Income Before Taxes 14,575 300

Income Taxes (40%) 5,830 120

Net Income $8,745 $180

SILVER CLOUD COMPUTING

Balance Sheets

February 28, 2018 and 2017 and February 29, 2016

At Inception

Feb 28 2018 Feb 28 2017 Feb 29 2016

(in thousands) (in thousands) (in thousands)

Cash $55,755 $22,300.00 $10,000

Accounts Receivable 18,000 16,000 -

Net Computer Equipment 20,000 40,000 60,000

Total Assets $93,755 $78,300 $70,000

Accounts Payable $9,000 $8,000 $-

Taxes Payable 5,830 120 -

Long-term Debt 30,000 30,000 30,000

Common Stock 40,000 40,000 40,000

Retained Earnings 8,925 180 -

Total Liabilities & Stockholders Equity $93,755 $78,300 $70,000

Answer 1

On the basis of the cursory reading of the figures, I interptret following measures to reduce expesnes:

• Company have spent roughly 15% of the sales amount in the marketing expenses, while the industry average is quite low than that. Company can either change their marketing stratgy now to boost sales or they can reduce it and emphasis on providing excellent services to have mouth publicity of their services
• Company maangement should also have check on bad debts expesnses as it is the business in which customers pay in advance to avail services. So having bad debts is unusual.
• As regards cyber attack, its implications can be vast, not just in monetary considerations but also the facts that it gives negative perception to the potential customers for the security of their data.

• The amount of legal expenses to be borne by the company to meet the lawsuit will lead to the reduction of the profit of the company. While the demarrage being paid by the company will also reduce the profit of the company consequently, even may also jeopardize its networth, if the amount is substantially high.

• Considering that company have to pay interest on their debts, repay bonds after few years and the busness is still not fully growing, it is advised not to pay dividend and invest the money in improving services.