CHAPTER 2
CASH FLOWS AND FINANCIAL
STATEMENTS AT SUNSET BOARDS
Below are the financial statements that you are asked to prepare.
1. The income statement for each year will look like this:
Income Statement
2014 2015
Sales $385,724 $470,172
Cost of goods sold 196,619 248,263
Selling and administrative 38,668 50,469
2. The balance sheet for each year will be:
Balance Sheet as of Dec. 31, 2014
Cash $28,372 Accounts payable $20,143
Accounts receivable 20,104 Notes payable 22,855
In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since
total liabilities and equity is equal to total assets, equity can be calculated as:
Balance Sheet as of Dec. 31, 2015
Cash $42,865 Accounts payable $34,091
Accounts receivable 26,078 Notes payable 24,955
The owner’s equity for 2015 is the beginning of year owners’ equity, plus the addition to retained
earnings, plus the new equity, so:
3. Using the OCF equation:
OCF = EBIT + Depreciation – Taxes
The OCF for each year is:
4. To calculate the cash flow from assets, we need to find the capital spending and change in net
working capital. The capital spending for the year was:
Capital spending
Ending net fixed assets $298,350
+ Depreciation 62,738
So, the cash flow from assets was:
Cash flow from assets
Operating cash flow $142,979
5. The cash flow to creditors was:
Cash flow to creditors
Interest paid $13,831
6. The cash flow to stockholders was:
Cash flow to stockholders
Dividends paid $26,564
Answers to questions
1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from
operations. The firm invested $17,770 in new net working capital and $116,207 in new fixed assets.
2. The expansion plans may be a little risky. The company does have a positive cash flow, but a large
portion of the operating cash flow is already going to capital spending. The company has had to raise
