Chapter 2 Mini Case 1

Cash Flows and Financial Statements at Sunset Boards

Sunset Boards is a small company that manufactures and sells surfboards in Cape
Town. Sipho, 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 companys
financial records are not well maintained.
The initial investment in Sunset Boards was provided by Sipho and his friends
and family. Since the initial investment was relatively small, and the company has
only made surfboards for its own store, the investors havent required detailed
financial statements from Sipho. But, thanks to word of mouth among professional
surfers, sales have picked up recently, and Sipho is considering a major expansion.
His plans include opening another surfboard shop in Knysna, as well as supplying
other sellers. Siphos 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 lenders require more
organized and detailed financial statements than Sipho has previously prepared. At
the urging of his investors, Sipho has hired a financial analyst to evaluate the
performance of the company over the past year.
After rooting through old bank statements, sales receipts, tax returns and other
records, the analyst has assembled the following information:

Cost of goods sold

Cash
Depreciation
Interest expense
Selling and administrative expenses
Accounts payable
Non-current assets
Sales
Accounts receivable
Bank overdraft
Long-term debt
Inventory
New equity

2007
84 310
12 165
23 800
5 180
16 580
21 500
105 000
165 390
8 620
9 800
53 000
18 140
0

2008
106 450
18 380
26 900
5 930
21 640
24 350
134 000
210 600
11 182
10 700
61 000
24 894
10 000

Sunset Boards currently pays out 30 per cent of net profit after tax as dividends to
Sipho and the other original investors, and has asked you to prepare the following:
1. An income statement and balance sheet for 2007 and 2008.
2. Operating cash flow for each year.
3. Cash flow from assets for 2008.
4. Cash flow to lenders and cash flow to shareholders for 2008.
Questions
1. How would you describe Sunset Boards cash flows for 2008? Write up a
brief discussion.
2. In light of your discussion in the previous question, what do you think about
Siphos expansion plans?