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:
WARF COMPUTERS BALANCE SHEETS
(in thousands)
2021 2022
2021 2022
Current assets
Current liabilities
Cash and equivalents
\$ 516 \$ 596
Accounts payable
\$ 645 \$ 685
Accounts receivable
883 945
Accrued expenses
529 329
Inventories
875 846
Total current liabilities
\$1,174 \$ 1,014
Other
103 121
Long-term liabilities
Total current assets
\$2,377 \$2,508
Deferred taxes
\$ 210 \$ 282
Fixed assets
Long-term debt
1,517 1,557
Property, plant, and equipment
\$4,197 \$5,476
Total long-term liabilities
\$1,727 \$1,839
Less accumulated depreciation
1,441 1,777
Stockholders' equity
Net property, plant, and equipment
\$2,756 \$3,699
Preferred stock
\$ 25 \$ 25
Intangible assets and others
936 1,047
Common stock
166 171
Total fixed assets
\$3,962 \$4,746
Capital surplus
1,027 1,044
Accumulated retained earnings
2,116 3,414
Less treasury stock
166 253
Total equity
\$3,168 \$4,401
Total assets
\$6,069 \$7,254 Total liabilities and shareholders' equity \$6,069 \$7,254
WARF COMPUTERS
INCOME STATEMENT
(in thousands)
Sales
\$9,975
Cost of goods sold
5,882
Selling, general, and administrative expense
933
Depreciation
336
Operating income
\$2,824
Other income
98
EBIT
\$2,922
Interest expense
180
Pretax income
\$2,742
Taxes
687
Current: \$615
Deferred: \$72
Net income
\$2,055
Dividends: \$757
Retained earnings: \$1,298
Nick also has provided the following information: During the year the company raised \$301,000 in new long-term debt and retired \$261,000 in long-term debt. The company also sold \$22,000 in new stock and repurchased \$87,000 in stock. The company purchased \$1,955,000 in fixed assets and sold \$565,000 in fixed assets.
Angus has asked you to prepare the financial statement of cash flows and the accounting statement of cash flows. He also has asked you to answer the following questions:
1. How would you describe Warf Computer’s 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 Nick’s expansion plans.
