CASH FLOWS AT WARF COMPUTERS, INC. Mini Case 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 virtual 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 generation 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 exam- ine the financial statements provided by Nick. Here are the balance sheet for the two most recent years and the most recent income statement: WARF COMPUTERS Balance Sheet ($ in thousands) 2012 2011 2012 2011 Current assets Current liabilities $ 348 $ 301 $ 314 $ 294 Cash and equivalents Accounts receivable Inventories 551 514 85 79 493 510 Accounts payable Notes payable Accrued expenses Total current liabilities 190 308 Other 71 60 Total current assets $1,463 $1.385 $ 589 $ 681 Fixed assets Long-term liabilities Deferred taxes $ 254 $ 124 $3.191 $2,446 907 883 Long-term debt Total long-term liabilities 1,031 840 $1.161 $1.007 Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and others Total fixed assets $2.160 $1.606 $ 16 $ 16 610 545 97 97 $2.770 $2,151 611 599 Stockholders' equity Preferred stock Common stock Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders' equity 1,904 1.233 145 97 $2,483 $1.848 Total assets $4.233 $3,536 $4,233 $3,536 Nick has also provided the following information: During the year the company raised $175,000 in new long-term debt and retired $151,000 in long-term debt. The company also sold $12,000 in new stock and repurchased $48,000 in stock. The company purchased $1,140,000 in fixed assets and sold $330.000 in fixed assets WARF COMPUTERS Income Statement ($ in thousands) Sales $5.813 3.430 652 Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income 191 $1.540 58 $1.598 EBIT 105 Interest expense Pretax income $1.493 Taxes 597 Current $467 Deferred: 130 Net income Dividends $ 896 $ 225 $ 671 Retained earnings Angus has asked you to prepare the financial statement of cash flows and the account- ing statement of cash flows. He has also asked you to answer the following questions: 1. How would you describe Warf Computers' cash flows? 2. Which cash flow statement more accurately describes the cash flows at the company? 3. In light of your previous answers, comment on Nick's expansion plans CASH FLOWS AT WARF COMPUTERS, INC. Mini Case 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 virtual 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 generation 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 exam- ine the financial statements provided by Nick. Here are the balance sheet for the two most recent years and the most recent income statement: WARF COMPUTERS Balance Sheet ($ in thousands) 2012 2011 2012 2011 Current assets Current liabilities $ 348 $ 301 $ 314 $ 294 Cash and equivalents Accounts receivable Inventories 551 514 85 79 493 510 Accounts payable Notes payable Accrued expenses Total current liabilities 190 308 Other 71 60 Total current assets $1,463 $1.385 $ 589 $ 681 Fixed assets Long-term liabilities Deferred taxes $ 254 $ 124 $3.191 $2,446 907 883 Long-term debt Total long-term liabilities 1,031 840 $1.161 $1.007 Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and others Total fixed assets $2.160 $1.606 $ 16 $ 16 610 545 97 97 $2.770 $2,151 611 599 Stockholders' equity Preferred stock Common stock Capital surplus Accumulated retained earnings Less treasury stock Total equity Total liabilities and shareholders' equity 1,904 1.233 145 97 $2,483 $1.848 Total assets $4.233 $3,536 $4,233 $3,536 Nick has also provided the following information: During the year the company raised $175,000 in new long-term debt and retired $151,000 in long-term debt. The company also sold $12,000 in new stock and repurchased $48,000 in stock. The company purchased $1,140,000 in fixed assets and sold $330.000 in fixed assets WARF COMPUTERS Income Statement ($ in thousands) Sales $5.813 3.430 652 Cost of goods sold Selling, general, and administrative expense Depreciation Operating income Other income 191 $1.540 58 $1.598 EBIT 105 Interest expense Pretax income $1.493 Taxes 597 Current $467 Deferred: 130 Net income Dividends $ 896 $ 225 $ 671 Retained earnings Angus has asked you to prepare the financial statement of cash flows and the account- ing statement of cash flows. He has also asked you to answer the following questions: 1. How would you describe Warf Computers' cash flows? 2. Which cash flow statement more accurately describes the cash flows at the company? 3. In light of your previous answers, comment on Nick's expansion plans