Beruflich Dokumente
Kultur Dokumente
Cash Flow
and
Financial
Planning
Learning Goals
LG1 Understand tax depreciation procedures and the effect
of depreciation on the firms cash flows.
LG2 Discuss the firms statement of cash flows, operating
cash flow, and free cash flow.
LG3 Understand the financial planning process, including
long-term (strategic) financial plans and short-term
(operating) financial plans.
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Depreciation
Depreciation is the portion of the costs of fixed assets
charged against annual revenues over time.
Depreciation for tax purposes is determined by using the
modified accelerated cost recovery system (MACRS).
On the other hand, a variety of other depreciation methods
are often used for reporting purposes.
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Depreciation: An Example
Baker Corporation acquired a new machine at a cost of
$38,000, with installation costs of $2,000. When the
machine is retired from service, Baker expects that it will
sell it for scrap metal and receive $1,000.
What is the depreciable value of the machine?
Regardless of its expected salvage value, the depreciable value
of the machine is $40,000: $38,000 cost + $2,000 installation
cost.
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Depreciation: An Example
Baker Corporation acquired, for an installed cost of $40,000, a
machine having a recovery period of 5 years. Using the applicable
MACRS rates, the depreciation expense each year is as follows:
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Table 4.3
Inflows and Outflows of Cash
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Interpreting Statement of
Cash Flows
The statement of cash flows ties the balance sheet at the
beginning of the period with the balance sheet at the end
of the period after considering the performance of the firm
during the period through the income statement.
The net increase (or decrease) in cash and marketable
securities should be equivalent to the difference between
the cash and marketable securities on the balance sheet at
the beginning of the year and the end of the year.
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Where:
NFAI = Change in net fixed assets + Depreciation
NCAI = Change in CA Change in (A/P + Accruals)
2012 Pearson Prentice Hall. All rights
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Focus on Practice
Free Cash Flow at Cisco Systems
On May 13, 2010, Cisco Systems reported earnings per share of $0.42 for the
most recent quarter, ahead of the expectations of Wall Street experts who had
projected EPS of $0.39.
In subsequent analysis, one analyst observed that of the three cents by which
Cisco beat the streets forecast, one cent could be attributed to the fact that
the quarter was 14 weeks rather than the more typical 13 weeks. Another
penny was attributable to unusual tax gains, and the third was classified with
the somewhat vague label, other income.
Free cash flow is often considered a more reliable measure of a companys
income than reported earnings. What are some possible ways that corporate
accountants might be able to change their earnings to portray a more
favorable earnings statement?
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Focus on Ethics
How Much Is a CEO Worth?
Bob Nardelli abruptly resigned his position as Home Depot CEO on
January 3, 2007.
Nardellis total severance package amounted to $210 million, including
$55.3 million of life insurance coverage, reimbursement of $1.3 million of
personal taxes related to the life insurance, $50,000 to cover his legal fees,
$33.8 million in cash due July 3, 2007, an additional $18 million over 4 years
for abiding by the terms of the deal, and the balance of the package from
accelerated vesting of stock options.
In addition, Nardelli and his family would receive health-care benefits from
the company for the next 3 years.
What are some possible activities that Nardelli must avoid in order to reap
the additional $18 million over 4 years?
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Figure 4.1
Short-Term Financial Planning
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Cash Planning:
Cash Budgets (cont.)
A sales forecast is a prediction of the sales activity during a given
period, based on external and/or internal data.
The sales forecast is then used as a basis for estimating the monthly
cash flows that will result from projected sales and from outlays
related to production, inventory, and sales.
The sales forecast may be based on an analysis of external data,
internal data, or a combination of the two.
An external forecast is a sales forecast based on the relationships observed
between the firms sales and certain key external economic indicators.
An internal forecast is a sales forecast based on a buildup, or consensus, of
sales forecasts through the firms own sales channels.
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Profit Planning:
Pro Forma Statements
Pro forma financial statements are projected, or
forecast, income statements and balance sheets.
The inputs required to develop pro forma statements using
the most common approaches include:
Financial statements from the preceding year
The sales forecast for the coming year
Key assumptions about a number of factors
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LG2
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Chapter Resources on
MyFinanceLab
Chapter Cases
Group Exercises
Critical Thinking Problems
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