How would you describe Sunset Boards’ cash flows for 2014? Write a brief discussion.

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 Paula 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, Paula has assembled the following information:

2013   2014

Cost of goods sold   $169,969    214,607

Cash      24,524      26,056

Depreciation      47,980      54,230

Interest expense      10,442      11,954

Selling & administrative expenses      33,425      43,626

Accounts payable      43,344      48,090

Net fixed assets     211,680     264,021

Sales     333,426     406,427

Accounts receivable       17,378      22,542

Notes payable       19,757      21,571

Long-term debt     106,848    119,976

Inventory       36,570     50,185

New equity                0     20,160

Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and has a 20 percent tax rate. You are Paula’s assistant, and she has asked you to prepare the following:

1. An income statement for 2013 and 2014.

2. A balance sheet for 2013 and 2014.

3. Operating cash flow for each year.

4. Cash flow from assets for 2014.

5. Cash flow to creditors for 2014.

6. Cash flow to stockholders for 2014.

QUESTIONS

1.How would you describe Sunset Boards’ cash flows for 2014? Write a brief discussion.

2.In light of your discussion in the previous question, what do you think about Tad’s expansion plans?