Lost Peak Winery, Inc. (B)
Roberto and Pablo Conca have just completed the first year of operations of the Lost Peak Winery, Inc. as described in the Lost Peak Winery, Inc. (A) case. The first year of operations has been successful but the company faced considerable competition from high-quality, low-priced wines from Australia, South Africa and Spain. Stiff competition had forced the company to cut its wine prices and some customers had not complied with the company's credit terms, resulting in lower cash collections. The company also experienced higher costs than anticipated. In response to these developments, the company took longer to pay its trade creditors and had obtained and emergency short-term loan. Why did the company need an emergency short-term loan? In Lost Peak Winery (B), Pablo and Roberto Conca plan to prepare a statement of cash flows and analyze how changes in the business affected the company's cash flows.
The brothers also decided that they should also plan their business over a longer horizon to avoid being unable to meet the long-term debt repayment schedule and to be able to arrange for future financings should the need additional cash to continue growing. In Lost Peak Winery (C), Pablo and Roberto plan to prepare proforma financial statements for the next five years to examine the effects of alternative business scenarios on the company's cash flows.
In the (B) case, students prepare a statement of cash flows for the first year of operations in an Excel spreadsheet using the beginning balance sheet, the actual ending balance sheet and the actual income statement. Since Pablo and Roberto were forced to obtain an emergency short-term loan they would like to know why this occurred. Students evaluate the effect of changing some balance sheet items on the cash flow statement assuming that any discrepancies in the balance sheet result in a change in short-term loans payable. That is, students must write a formula for short-term loans payable so that the balance sheet automatically balances. In effect, any excess (deficiency) cash flows result in the company repaying (borrowing) short-term loans payable. The revised spreadsheet shows that Lost Peak Winery would have only needed a short-term loan of $7 rather than $177 as need under the original scenario. The completed cash flow statement is provided in Exhibit TN-1. The revised cash flow statement is provided in Exhibit TN-2. In the C case, students prepare proforma financial statements for five years ahead and examine the effect of operational efficiencies and future growth rates on future cash flows. The completed five-year proforma for the scenarios are provided in Exhibit TN-3 (original ratios), Exhibit TN-4 (revised ratios) and Exhibit TN-5 (different growth rates).