Professional Documents
Culture Documents
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:
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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. During his six year tenure, The Home Depots
stock fell 8%.
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.
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Figure 4.1
Short-Term Financial Planning
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Short-term (1 year)
Intermediate-term (25 years)
Long-term (6+ years)
Each goal should be clearly defined and have a priority,
time frame, and cost estimate.
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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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