Cash Flows at Warf Computers, Inc. Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer.

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. WARF COMPUTERSBalance Sheet($ in thousands)2006 2005Current assets:   Cash and equivalents $ 232 $ 201   Accounts receivable    367    342   Inventories    329    340  Other      47     40Total current assets $ 975$ 923 Fixed assets:   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     363Total fixed assets $1,824$1,433 Total assets $2,799 $2,356 Current liabilities: Accounts payable $ 263 $ 197 Notes payable      68      53 Accrued expenses    126    205 Total current liabilities$ 457 $ 455 Long-term liabilities: Deferred taxes $ 143 $  82 Long-term debt    629    589 Total long-term liabilities$ 772 $ 671 Stockholders' equity: Preferred stock $   10 $   10 Common stock      72      64 Capital surplus    438    399 Accumulated retained earnings1,147    822 Less treasury stock    -97    -65 Total equity $1,570 $1,230 Total liabilities and shareholders' equity $2,799 $2,356 WARF COMPUTERSIncome Statement($ in thousands)Sales $3,875 Cost of goods sold   2,286 Selling, general, and administrative expense      434 Depreciation      127 Operating income $1,028 Other income        38 Earnings before interest and taxes (EBIT) $1,066 Interest expense        76 Pretax income $  990 Taxes      347 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.