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|
|Changes in assets and liabilities|
|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|
|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.
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.