Cash Flows at Warf Computers, Inc.
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 vir-
tual 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 gen-
eration 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. Below is the balance sheet for the two most recent years and the most recent income statement.
($ in thousands)
Cash and equivalents $ 232 $ 201
Accounts receivable 367 342
Inventories 329 340
Other 47 40
Total current assets $ 975 $ 923
Property, plant, and equipment $2,105 $1,630
Less accumulated depreciation 687 560
Net property, plant, and equipment $1,418 $1,070
Intangible assets and others 406 363
Total fixed assets $1,824 $1,433
Total assets $2,799 $2,356
Accounts payable $ 263 $ 197
Notes payable 68 53
Accrued expenses 126 205
Total current liabilities $ 457 $ 455
Deferred taxes $ 143 $ 82
Long-term debt 629 589
Total long-term liabilities $ 772 $ 671
Preferred stock $ 10 $ 10
Common stock 72 64
Capital surplus 438 399
Accumulated retained earnings 1,147 822
Less treasury stock -97 -65
Total equity $1,570 $1,230
Total liabilities and
shareholders' equity $2,799 $2,356
($ in thousands)
Cost of goods sold 2,286
Selling, general, and administrative expense 434
Operating income $1,028
Other income 38
Earnings before interest and taxes (EBIT) $1,066
Interest expense 76
Pretax income $ 990
Current: $ 286
Deferred: $ 61
Net income $ 643
Addition to retained earnings $ 325
Dividends $ 318
Nick has also provided the following information: During the year the company raised $94,000 in new long-term debt and retired $54,000 in long-term debt. The company also sold $47,000 in new stock and repurchased $32,000 in stock. The company purchased $629,000 in fixed assets and sold $111,000 in fixed assets.
1. How would you describe Warf Computers' cash flows?
2. Which cash flow statement more accurately describes the cash flows at the company, the financial statement of cash flows or the accounting statement of cash flows?
3. Comment on War Computer's expansion plans.
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