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Cash Flows at Warf Computers, Inc.

The net cash change of Warf Computers, Inc. was positive. Cash and equivalents of the company increased from $301,000 in 2011 to $348,000 in 2012. The cash flow statement also reflected that the company had sufficient cash to repay its long-term debt and also to meet its operational needs. Based on its strong cash position, it is possible for the company to acquire additional borrowing and maintain its financial leverage at a reasonable level. If the company continues to generate positive operating profits, then it will not face difficulties for its interest obligations (Eisen, 2007).

$ in ‘000s
Cash flow from operating activities
Net income 896
Add: Depreciation 191
Deferred Tax 130
Changes in assets and liabilities
Accounts receivables -37
Inventories 17
Accounts payable 20
Accrued expenses -118
Other -11
Net cash flow from operating activities 1088
Cash flow from investing activities
Acquisition of fixed assets -1140
Sale of fixed assets 330
Net cash flow from investing activities -810
Cash flow from financing activities
Proceeds from long-term debt 175
Repayment of long-term debt -151
Changes in notes payable 6
Dividends -225
Issuance of stock 12
Repurchase of stock -48
Net cash flow from financing activities -231
Change in Cash 47

A company’s ability to generate positive cash flows sends positive signals to shareholders, employees, and potential investors. In case of Warf Computers, Inc., which is seeking external financing from equity and debt providers, it can be noted that the company generated sufficient operating profits that cover its interest payments. Moreover, positive cash flows are a good sign to suggest that the company has the potential of further growth.

For Warf Computers, the indirect method of cash flow statement is appropriate as no information of customers’ accounts and suppliers’ accounts was provided that could be used for preparing cash flow statement using the direct method.

As Nick Warf plans to expand his company, it is important that the company continues to generate positive cash flows in the future. Positive cash flow and strong earnings of the company implies that the company has the potential for investing in its future expansion plan. Shareholders are usually interested in the company’s net operating cash flow rather than net profits as they can be easily manipulated. The matching concept in accounting requires companies to realize and record transactions for which cash has been exchanged (Ross, Westerfield, & Jordan, 2012).

After preparing Warf Computers’ cash flow statement and highlighting the importance of generating positive cash flows, I would recommend that the company must go ahead with its expansion plan. The company has sufficient cash flows and it has the ability to generate positive cash flows that could assist in making principal repayments and interest payments.

References

Ross, ‎A., Westerfield, R., & Jordan, ‎. D. (2012). Corporate Finance (10th ed.). New York: Mc-Graw Hill Irwin.

Eisen, P. J. (2007). Accounting. New York: Barron’s Educational Series.

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