Sunset Boards, Inc., 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 Christina Jennings 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:

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2020 and 2021.

2. A balance sheet for 2020 and 2021.

3. Operating cash flow for each year.

4. Cash flow from assets for 2021.

5. Cash flow to creditors for 2021.

6. Cash flow to stockholders for 2021.

QUESTIONS

1. How would you describe Sunset Boards’s cash flows for 2021? Write a brief discussion.

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

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2020 2021 Cost of goods sold $306,726 $387,290 Cash 44,261 66,870 Depreciation 86,590 97,871 Interest expense 18,824 21,576 Selling and administrative 60,322 78,732 Accounts payable 31,423 53,181 Net fixed assets 382,014 465,426 Sales 601,729 733,469 Accounts receivable 31,363 40,681 Notes payable 35,654 38,929 Long-term debt 192,827 210,408 Inventory 60,382 81,209 New equity 23,400