This was produced as an animation test for motion shading, and lighting of things like water rippling to make it believable. It was later screened at the 1986 SIGGRAPH, and included as an easter egg on the 2007 video compilation Pixar Short Films Collection, Volume 1.
The first flag shown is a flag version of the famous SMPTE color bars.
This film was made by Pixar to experiment with the textures and movement of cloth and water in animation.