Sunset Boards. 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 hired financial analyst Paula 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, Paula has assembled the following information: 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 Paula's assistant, and she has asked you to prepare the following: 1. An income statement for 2007 and 2008. 2. A balance sheet for 2007 and 2008. 3. Operating cash flow for each year. 4. Cash flow from assets for 2008. 5. Cash flow to creditors for 2008. 6. Cash flow to stockholders for 2008. Information 2007 Cost of goods sold Cash Depreciation Interest expense SGA Expenses $96,952 13,990 27,370 5,950 19,067 2008 $122,418 21,137 30,936 6,820 24,886 725 120. How would you describe Sunset Boards' cash flows for 20087 Write a brief discussion 8.115 231.003 147.Accounts payable Fixed assets Sales 24.270 60.750 190.859 12. In light of your discussion in the previous question what do you think about Tad's expansion plans? Analysis 1.199 28.913 Notes payable Long-term debt Inventory New equity 11.628 12.861 0 7.305 70.840 12.150 28.000 Accounts receivable 9. An income statement for 2007 and 2008. Income Statement .950 20. 424 $18.780 9.764 $120.688 $16.600 6.952 $93.344 231.370 $46. Balance Sheet for 2007 Cash Accounts Receivable Inventory Current Assets Net Fixed Assets Gross Fixed Assets $13.886 30.936 $53.270 $35.810 5.950 $40.750 $148. A balance sheet for 2007 and 2008.344 $16.422 24.990 $9.120 Accounts Payable Notes Payable Current Liabilities Long Term Debt $24.950 Total Debt Owners Equity $96.820 $46.712 2.712 $18.995 $60.861 $44.247 19.860 8.172 $32.199 96.356 $37.945 $68.2007 2008 Sales COGS Gross Profit SGA Depreciation EBIT/Operating Income Interest EBT Taxes NI (rRE) Dividends (RE) 190.725 $11.913 $20.418 $109.067 27.840 122.569 . 739 Retained Earnings Total Liabilities and Net Worth $209.859 $28.281 $52.739 $35.003 $12.225 $12.370 Original Equity Retained Earnings $52.306 Accounts Payable Notes Payable Current Liabilities Long Term Debt Total Debt Owners Equity Original Equity New Equity $28.514 Balance Sheet for 2008 Cash Accounts Receivable Inventory Current Assets Net Fixed Assets Gross Fixed Assets Depreciation $21.150 $110. 4. Operating cash flow for each year.Depreciation $27.305 $40.056 3.344 Total Assets $165.308 $70.624 $147.458 $99.514 Total Liabilities and Net Worth $165.137 $12.225 $16. .628 $62. Cash flow from assets for 2008.000 Total Assets $209.115 $205.421 $58. 120) (57.725 (2.301) FA(148.225 Div Cash Flow from Investing Activities (148.913) I(20.946) (7.270 LTD60.523 NP11.008 Cash Flow From Operations NI Depreciation 32.007 2.000 (16.The answers to questions 3 and 4 are displayed below in the Cash Flow Statements for 07 and 08.936 60.035 9.120) . Cash Flow Statement 2.950 OE52.301) (57.344) (18.424 30.712) 3.101 1.200 12.767) 3.278 Cash Flow from Financing Activities 108.009 37.688 27.925 s in Current Accounts AR(9.370 54.861) AP24. If the forecast for the future includes additional fixed assets. Sunset has established a brand name and apparently. At this early stage of the company’s history. Cash flow to stockholders for 2008. there are several considerations. There are additional considerations. Further.990 7. First. additional sources of funding will have to be obtained. expansion (in terms of a new location) might well be delayed for new location. without the infusion of additional equity in 2008. 8. consumers are willing to pay the . Sunset generated significant cash flows from operations. which comes from the income statement and from the cash flow statement. Sunset has invested significantly in fixed assets in both years of its history. Nevertheless. Therefore.712. An analysis of Sunset’s cash flows for 2007 and 2008 reveal the following items of significance. he will be trading off margin for additional volume. the overall cash flow for Sunset would have been negative and they would have been forced to either obtain additional debt financing or reduce the dividend payout ratio. significant external funding would be required regardless of the decision to change the dividend payout ratio. How would you describe Sunset Boards' cash flows for 2007 and 2008? Write a brief discussion. 6.147 5. We do not have sufficient information to determine the impact of such changes. there is a question as to whether or not Sunset can produce the additional boards required to enter the wholesale market without the addition of significant amount of fixed assets since additional assets were required in the second year of operations to sustain current sales volume. The cash flow to creditors consisted of the payment of interest on long-term debt in the amount of $6. With respect to the idea of wholesaling his boards to other vendors. Based on the cash flow statements. The cash flow to stockholders for 2008 consisted of the payment of dividends in the amount of $18. so one must assume that the core of the business (building and selling surfboards) is a viable ongoing enterprise.Net Cash Flow 13. So without additional information. In light of your discussion in the previous question what do you think about Tad's expansion plans? Sunset would be entering a uncertain new market with new competitive dynamic relationship with competitors. I would be hesitant to support this idea. he would have to reduce his profit margin on each board distributed through this channel.820. which comes from the income statement. Cash flow to creditors for 2008. 7. this exclusive product will become one of many available in surfboard shops – thus diluting the value of the brand.asking price for such. By wholesaling the boards to others. .