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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
2017 2018
Sales $501,441 $611,224
Cost of goods sold 255,605 322,742
Selling and administrative 50,268 65,610
2. The balance sheet for each year will be:
Balance Sheet as of Dec. 31, 2017
Cash $36,884 Accounts payable $26,186
Accounts receivable 26,136 Notes payable 29,712
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, 2018
Cash $55,725 Accounts payable $44,318
Accounts receivable 33,901 Notes payable 32,441
Inventory 67,674 Current liabilities $76,759
The owner’s equity for 2018 is the beginning of year owners’ equity, plus the addition to retained
earnings, plus the new equity, so:
3. Using the OCF equation:
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
And the change in net working capital was:
Change in net working capital
So, the cash flow from assets was:
Cash flow from assets
5. The cash flow to creditors was:
Cash flow to creditors
6. The cash flow to stockholders was:
Cash flow to stockholders
Answers to questions
1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from
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
