Name: Mervin R.

Coquilla
Year and Section: BSAIS-3B

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
hire financial analyst Christina 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, Christina has assembled the following information.

2008 2009
Cost of goods sold $126,038 $159,143
Cash 18,187 27,478
Depreciation 35,581 40,217
Interest expense 7,735 8,866
Selling and administrative 24,787 32,352
Accounts payable 32,143 36,404
Net fixed assets 156,975 191,250
Sales 247,259 301,392
Accounts receivable 12,887 16,717
Notes payable 14,651 15,997
Long-term debt 79,235 91,195
Inventory 27,119 37,216
New equity 0 15,600

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 Christina’s assistant, and she has ask
you to prepare the following:

1. An income statement for 2008 and 2009.

Income Statement
2008 2009
Sales $247,259 $301,392
Cost of goods sold 126,038 159,143
Selling and administrative 24,787 32,352
Depreciation 35,581 40,217
Earnings before interest Exp. and Taxes 60,853 69,680
Interest 7,735 8,866
Earnings before Tax 53,118 60,814
Taxes 10,624 12,613
Net Income $42,494 $48,651
 Dividends $21,247 $24,326
Addition to retained earnings $21,247 $24,326

2. A balance sheet for 2008 and 2009

Balance Sheet for 2008 and 2009

Cash $18,187
Accounts receivable 12,887
Inventory 27,119
Currents assets 58,193

Net fixed assets 156,975

Total Assets 215,168

Accounts payable 32,143

Notes payable 14,651
Current liabilities 46,794

Long-term debt 79,235

Owners equity 89,139
Total liability and Equity $215,168

Balance Sheet as of December 31, 2009

Cash $27,478
Accounts receivable 16,717
Inventory 37,216
Current assets 272,661

Net fixed assets 191,250

Total assets 272,661

Accounts payable 36,404

Notes payable 15,997
Current liabilities 52,401

Long-term debt 92,195

Owner’s Equity 129,065
Total liability and equity $272,661

3. Operating cash flow for each year.

Operating Cash Flow

2008 2009
EBIT $60,853 EBIT $69,680
Add: Depreciation 35,581 Add: Depreciation 40,217
Less: Taxes (10,624) Less: Taxes (12,163)
Operating Cash Flow: $85,810 Operating Cash Flow: $97,734

4. Cash Flow from Assets for 2009.

a. Net Capital Spending
Net Fixed Assets on 2009 $191,250
 Less: Net Fixed Assets on 2008 (156,975)
Add: Depreciation on 2009 40,217
$74,492

b. Change in Net Working Capital

Ending Net Working Capital $29,010
Less: Beginning Net Working capital (11,399)
$17,611

c. Cash Flow from Assets

Operating Cash Flow $97,734
Less: Net capital Spending (74,492)
Change in Net Working Capital (17,611)
$5,631

5. Cash Flow to creditors for 2009.

Interest paid $8,866
Less: Net New Borrowing (11,960)
($3,094)

6. Cash Flow to stockholders for 2009.

Dividends Paid $24,326
Less: Net New equity raised 15,600
$8,726

Questions:

1. How would you describe Sunset Board’s cash flows for 2009? Write a brief discussion.

The cash flows in 2009 show that the business is doing great where the sales are
going well despite their financial records are not well maintained. In 2009 there is an increase
of $11,924 in their operating cash flow. Based on their cash flow Sunset Board has the ability
to pay interest, taxes, and dividends to all the investors, in fact, it’s all positive.

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

The positive output on sales that was shown in the Sunset Board Cash flow shows the
potential of the company to expand its business. Because the company needs additional funds
for its expansion, it is a good thing that they hired a financial analyst to organize their
financial statement so that they can attract investors and pull investors successfully.