Cash Flows at Warf Computers, Inc.
Mini-Case Study: Cash Flows at Warf Computers, Inc.
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I have attached a documents containing information that will be use in completing this paper. It is critical that the writer pay attention to details for this paper and all calculations must be clearly shown where require. The writer must respond to the 3 questions asked in the mini case as indicated in the assignment requirement.
• Mini-Case Study: Cash Flows at Warf Computers, Inc.
This case study, found on page 42 and 43 of the attachment , deals with a small computing firm that has developed a new, unique product and has decided to seek outside funding. You have been asked to help prepare the necessary financial statements. After reading the case study:
• Complete the financial statement of cash flows and the accounting statement of cash flows.
• Briefly answer the three additional questions referencing cash flows and expansion plans found on page 43 (2-3 sentences each).
Remember to include proper APA citations in all Mini-Case Study assignments.
Resources
• Articles
• Adams, S. (2008, February). Fundamentals of business economics. Financial Management (UK), 46–48. Retrieved from Business Source Premier database.
This article provides an analysis of the principal-agent problem and discusses some of the ways that many companies address the issue.
• Rappaport, A. (2006, September). Ten ways to create shareholder value. Harvard Business Review, 66–77. Retrieved from Business Source Premier database.
In this article, the author states his belief that there are certain principles that when followed will result in increased shareholder value for a company. He provides a review of the 10 steps he has found to be most important and provides a brief description of each.
• Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783. Retrieved from Business Source Premier database.
The authors use a survey instrument to study how financial suppliers use corporate governance to assure that they receive a return on their investment.
• Almazan, A., Banerji, S., & DeMotta, A. (2008). Attracting attention: Cheap managerial talk and costly market monitoring. Journal of Finance, 63(3), 1399–1436. Retrieved from Business Source Premier database.
This article presents a new theory as to the best way to increase shareholder value by seeking market attention while the firm is undervalued
Readings
•Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York: McGraw-Hill Irwin.
?Chapter 1, “Introduction to Corporate Finance”
This chapter introduces some of the basic ideas in corporate finance; namely, capital budgeting, capital structure, and cash flows. In addition, there is a discussion on maximizing the value of stock, one of the most important concepts in finance.
?Chapter 2, “Financial Statements and Cash Flow”
This chapter introduces and discusses basic corporate accounting procedures, as well as devices used to calculate a corporation’s cash flow from operations, changes in fixed assets, and changes in working capital.
SAMPLE ANSWER
Introduction
Cash flow statements final balance indicates the net cash flow in a business which reflects the balance of money which ultimately remains after deducting the total cash outflows flows from the cash inflows in a business for a particular financial period. (Vance, 2003) Payments and business expenses mostly form the cash outflows in a business while sales revenues, sale of assets and other incomes form the bulk of the cash inflows (Drucker, 1999). The company cash flows are as follows:
Table 1: Accounting Cash Flow
Table 2: Sources and Uses
Questions Answers
- The Warf computer’s cash flow has a positive net cash flow. The cash flow from operations was the most active besides the cash flow from investing activities. (Garrison, Noreen & Brewer, 2009)
The cash flow of Warf computers indicate that the increase in fixed assets is much more that it was reported. These means that more assets were bought or alternatively the assets that had been reported as sold were still in the company’s record. (Ross, Westerfield & Jaffe, 2013)
- The two methods of compiling the cash flow statement are direct and indirect methods. The indirect method is preferable as it reveals more information on the operations of the firm and it’s more commonly used. It starts with cash from operating activities which can be the net income of the company or the balance of the retained earnings in the balance sheet changes. (Khan, 1993)
- Nicks expansion could be affected by the highly levered firm. The company has a lot of debts and its current assets and current liabilities are almost on the range of 1:1 when they should be 1:2 respectively as per the current assets and the current liabilities. (Vance, 2003)
The Cash flow coverage = Net cash flow/ interest Expense
The Cash Flow Coverage = 47/105
= 44.76 %
The interest coverage ratio is not sufficient. The net cash flow value is below the normal average of 50% and above. This ratio points out that the company is heavily indebted. (Adams, 2008)
However, the expansion strategy of Nick would receive a boost if the investment made would result in large profits for the company. The company has invested heavily on its fixed assets which increased by 30.5% from the year 2012 as per the balance sheet financial statements. The sale of stock to raise money for the expansion may work but the company needs to do more to generate and expand its revenue base. Advertisement and aggressive marketing strategies might do wonders for the Warf Computer Company.
References
Adams, S. (2008) Fundamentals of business economics. Financial Management (UK), 46–48. Retrieved from Business Source Premier Database.
Drucker, F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
financial problems and make effective business decisions. New York: McGraw-Hill.
Garrison, R., Noreen, W. & Brewer, P. (2009) Managerial Accounting, McGraw-Hill Irwin.
Higher Education.
Khan, M. (1993) Theory & Problems in Financial Management, Boston: McGraw Hill
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th Ed.) New York: McGraw-Hill Irwin.
Vance, D. (2003) Financial analysis and decision making: tools and techniques to solve
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