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 examine the financial statements provided by Nick. Here are the balance sheets for the two most recent years and the most recent income statement:

Nick has also provided the following information: During the year the company raised $228,000 in new long-term debt and retired $197,000 in long-term debt. The company also sold $15,000 in new stock and repurchased $66,000 in stock. The company purchased $1,482,000 in fixed assets and sold $429,000 in fixed assets.
WARF COMPUTERS
Income Statement
($ in thousands)
Sales............................................................................................$7,557
Cost of goods sold.......................................................................4,456
Selling, general, and administrative expense..............................848
Depreciation....................................................................................248
Operating income......................................................................$2,005
Other income.....................................................................................75
EBIT..............................................................................................$2,080
Interest expense.............................................................................137
Pretax income............................................................................$1,943
Taxes................................................................................................776
Current: $605
Deferred: 171........................................................................_____
Net income................................................................................$1,167
Dividends......................................................................................$ 292
Retained earnings.......................................................................$ 875
Angus has asked you to prepare the financial statement of cash flows and the accounting 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.

WARF COMPUTERS Balance Sheet ($ in thousands) 2015 2014 2015 2014 Current assets Current liabilities Cash and equivalents 452 391 Accounts receivable Accounts payable Accrued expenses $ 519 $ 485 716 641 401 $ 766 $ 886 $ 330 $ 159 Total current liabilities Total current assets $1,901 $1,800 Long-term liabilities Deferred taxes Long-term debt 2 Fixed assets 1,179 1,148 $1,509 $1,307 $ 21 $ 21 Property, plant, and Total long-term liabilities $4,148 $3,179 equipment Less accumulated 1340 1,092 Stockholders' equity ation Preferred stock $2,808 $2,087 Common stock 793 709 Capital surplus Net property, plant, and 126 126 equipment Intangible assets and others Accumulated retained2,478 1,603 126 $3,227 $2,403 $3,60 $2,796 Total fixed assets earnings Less treasury stock 192 Total equity Total liabilities and shareholders' equity $5,502 $4,596 Total assets $5,502 $4,596