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    Case Quesion Chapter 2

    Uploaded by

    Mohamed Ahmed Abdelaty

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    © All Rights Reserved
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    Case Quesion Chapter 2

    Uploaded by

    Mohamed Ahmed Abdelaty
    13 views2 pages

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    Case Quesion chapter 2

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    Copyright:

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    13 views2 pages

    Case Quesion Chapter 2

    Uploaded by

    Mohamed Ahmed Abdelaty

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Chapter Case

    Cash Flows and Financial Statements of Deep Water


    Experts
    Deep Water Experts is the largest retailer of diving equipment for professional
    and recreational divers in the UAE. The company was founded in 2005 as a joint
    partnership and has experienced tremendous growth in its short history. The
    company’s headquarter is in Dubai with branches in Abu Dhabi and Ras Al
    Khaimah, and the recently added Dhibba branch, its only location on the East
    coast. The company’s founders, Marc Fabian and Ali Bin Hamdan chose Dubai
    because of its large expat community and the city’s geographic location. With the
    Arabian Gulf and its famous ship wrecks at its doorstep and the Indian Ocean
    with its abundant marine life only an hour and a half drives away, scuba diving
    has become a major past time in the UAE for residents and tourists alike. Marc
    and Ali are passionate divers themselves. They have always dreamt of running a
    business that allows them to combine work and fun. While financially successful,
    substantial investments were required to facilitate the company’s growth. Over
    time, Marc and Ali have asked several close friends and one family member to
    join their company as silent partners, making significant equity contributions. In
    addition, the company has obtained a short-term credit line from a local bank that
    also provides long-term credit at an interest rate of 8 percent.

    2013 2014
    Accounts payable Dh1865 Dh2310
    Sales 50,000 55,000
    Inventory ? 3,998
    Long-term debt ? 21,655
    Cogs 33,500 37,185
    Cash 3,236 5,712
    Current liabilities 2,988 3,660
    Total assets 42,923 50,630
    SG&A 7,500 8,250
    Current assets 7,973 ?
    Total debt 17,923 25,315
    Depreciation 3,495 3,857
    Notes payable 1,123 1,350
    Accounts receivables 2,139 2,355
    Equity 22,517 ?
    interest paid on LTD @8% 1,195 ?
    Net fixed assets ? 38565
    RE 2,483 4,773
    Dividends 621 ?
    Addition to Retained Earnings 2,483 ?
    Note: all values are in TDM dirham (Dh).
    Marc and Ali are driven by the desire to first expand into Saudi Arabia, to enter
    the Red Sea diving market, and eventually be present in all neighboring countries
    of the Gulf. Obviously, the cash flow implications would be substantial. They
    have hired you to advise them on the current status of the company’s cash flows.
    Unfortunately, the company’s financial records are not well maintained with
    several items missing. After rooting through old bank statements, sales receipts,
    tax returns, and other records, you have assembled the information in the table
    above.
    Marc also informed you that he is an American citizen. As a consequence, the
    income of the partnership is regarded as personal income as taxed accordingly
    by the US tax authority, the IRS, even though the UAE currently does not levy
    income taxes on this type of business. You decided to assume a marginal tax
    rate of 28 percent for your calculations. Ali also informed you, that they would like
    to continue to pay 20 percent of the company’s net income to its partners in form
    of dividends.

    QUESTIONS
    1. Create an income statement for 2013 and 2014.
    2. Create a balance sheet for 2013 and 2014.
    3. Determine the operating cash flow for both years.
    4. Compute the cash flow from assets for 2014.
    5. Compute the cash flow to creditors for 2014.
    6. Compute the cash flow to shareholders for 2014.
    7. State the cash flow equation for 2014.
    8. Interpret your cash flow analysis and state your main findings. Do you
    think the company’s expansion plans are realistic?

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