FINANCE/ACCOUNTING WK2
CHAPTER CASE STUDY
Cash Flows and Financial Statements at Sunset Boards, Inc.
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 Jameson Reid to evaluate the performance of the company over the past year.
After rooting through old bank statements, sales receipts, tax returns, and other records, Jameson has assembled the following information:
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 Jameson’s assistant, and he has asked you to prepare the following:
An income statement for 2015 and 2016.
A balance sheet for 2015 and 2016.
Operating cash flow for each year.
Cash flow from assets for 2016.
Cash flow to creditors for 2016.
Cash flow to stockholders for 2016.
How would you describe Sunset Boards’ cash flows for 2016? Write a brief discussion.
In light of your discussion in the previous question, what do you think about Tad’s expansion plans?
