Analyzing Cash Flows for Warf Computers: A Case Study

1 Intersession Case Study 1 Zebo Yuldasheva Ottawa University BUS 7600: Managerial Finance Dr. Vilane January 22, 2023

2 Introduction Warf Computers Inc., was found 15 years ago by a computer programmer, Nick Warf. Nick and his friends started with a small investment to start the company. Later, more investment was needed and they added equity and short and long-term debt. The company recently developed virtual keyboard (VK), which uses complex artificial intelligence (AI) algorithms (Ross et al.,2019). This feature allows users to speak and computer inputs the text, correct spelling and grammatical error and formats the files based on preset user guidelines (Ross et al.,2019). The VK has many other features such as alternative phrasing, sentence structure and stylistic diagnosis (Ross et al.,2019). This advanced hybrid technology requires big outside investment for the company to adopt. Nick decided to finance it with bank loans and new equity investments. As a financial institution, we need to evaluate Nick’s financial statements to check if we can loan him the money. In addition to the financial statements, Nick also raised $270,000 in new long-term debt and retired $238,000 in long-term debt. Also, Warf Computers Inc., sold $19,000 in new stock and repurchased $79,000 in stock. They also purchased $1,778,000 in fixed assets and sold $514,000 in fixed assets (Ross et al.,2019). How would you describe Warf Computer’s Cash Flows? After evaluating the balance sheets for 2018 and 2019 and most recent income statement, we were asked to prepare the financial statement of cash flows and the accounting statement of cash flows. After preparing the financial statement of cash flows, I came to conclusion that Warf Computers had positive earnings ($1,876,000), positive cash flows from operating activities ($2,049,000) and positive free cash flow ($876,000). The positive cash flows mean that core operations are generating business and there is enough money to buy new inventory. They spend

3 1,264,000 in fixed assets and $264,000 in net working capital. The company returned $628,000 to stockholders and $128,000 to creditors. This means that investors will value the high returns from operating activities. Investors can invest in this company considering positive cash flows. Which cash flow statement more accurately describes the cash flows at the company? Financial statement of cash flows (CFS) accurately describes the cash flow of the company because investors can make a decision by taking a quick look at it. It shows how cash is generated from operations, investments and financial activities. It shows a clear picture of the company’s expenses and revenues According to Investopedia, the CFS summarizes how well a company manages its cash to pay its dept and funds its operating expenses (Understanding the Cash Flow Statement, 2022). It basically highlights the amount of cash and its equivalents entering and leaving the company. Comment on Nick’s Expansion Plan Considering the amount of free cash flow, good net income, and the amount returned to shareholders, Nick should move forward with the expansion plans. Conclusion It was interesting to evaluate and prepare Warf Computers company’s financial statements of cash flows. The company has positive earnings and cash flows. There is enough money from the operating cash flow to invest in the new hybrid technology. The amount of current cash available in the company is a good sign for investors to see that the company has plenty money to cover the future loan expenses.

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4 References Ross, P., Westerfield, R., & Jaffe, J. (2019). Corporate finance (12th ed.). New York, NY: McGraw-Hill. Understanding the Cash Flow Statement . (2022, November 15). Investopedia. https://www.investopedia.com/investing/what-is-a-cash-flow- statement/

Case Study 1_Zebo Yuldasheva

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