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Mini Case: 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 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 sheet for the two most recent years and the most recent income statement:

Nick has also provided the following information: During the year the company raised $118,000 in new long-term debt and retired $98,000 in long-term debt. The company also sold $11,000 in new stock and repurchased $40,000 in stock. The company purchased $786,000 in fixed assets and sold $139,000 in fixed assets

Angus has asked you to prepare the financial statement of cash flows and the accounting statement of cash flows. He has also asked you to answer the following questions:

1. How would you describe Warf Computers 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 Nicks expansion plans.

WARF COMPUTERS Balance Sheet ($ in thousands) 2010 2009 2010 2009 Current assets Current liabilities $ 290 $ 251 $ 262 $ 245 Cash and equivalents Accounts receivable 459 428 Accounts payable Notes payable Accrued expenses 71 66 Inventories 411 425 158 257 Other 59 50 $ 491 $ 568 Total current liabilities Total current assets $ 1.219 $1.154 Fixed assets Long-term liabilities Deferred taxes $ 2.631 $2,038 $ 212 $ 103 756 736 859 700 Long-term debt Total long-term liabilities $ 968 $ 839 Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and others Total fixed assets $ 1.772 $1,338 Stockholders' equity Preferred stock $ 13 $ 13 508 454 Common stock 81 80 $ 2.280 $1,792 509 499 1.558 1,028 Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders' equity 121 81 $2,040 $1,539 Total assets $ 3,499 $2.946 $3,499 $2,946 WARF COMPUTERS Income Statement ($ in thousands) Sales $4,844 2.858 543 Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income 159 $1,284 48 Earnings before interest and taxes (EBIT) $1,332 Interest expense 95 Pretax income $1,237 Taxes 495 Current: $386 Deferred: 109 Net income $ 742 Addition to retained earnings $ 530 $ 212 Dividends WARF COMPUTERS Balance Sheet ($ in thousands) 2010 2009 2010 2009 Current assets Current liabilities $ 290 $ 251 $ 262 $ 245 Cash and equivalents Accounts receivable 459 428 Accounts payable Notes payable Accrued expenses 71 66 Inventories 411 425 158 257 Other 59 50 $ 491 $ 568 Total current liabilities Total current assets $ 1.219 $1.154 Fixed assets Long-term liabilities Deferred taxes $ 2.631 $2,038 $ 212 $ 103 756 736 859 700 Long-term debt Total long-term liabilities $ 968 $ 839 Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and others Total fixed assets $ 1.772 $1,338 Stockholders' equity Preferred stock $ 13 $ 13 508 454 Common stock 81 80 $ 2.280 $1,792 509 499 1.558 1,028 Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders' equity 121 81 $2,040 $1,539 Total assets $ 3,499 $2.946 $3,499 $2,946 WARF COMPUTERS Income Statement ($ in thousands) Sales $4,844 2.858 543 Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income 159 $1,284 48 Earnings before interest and taxes (EBIT) $1,332 Interest expense 95 Pretax income $1,237 Taxes 495 Current: $386 Deferred: 109 Net income $ 742 Addition to retained earnings $ 530 $ 212 Dividends

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