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Lecture Principles of Managerial finance (4th edition): Chapter 3 - Lawrence J. Gitman

Chapter 3 - Cash flow and financial planning. Individuals, like corporations, should focus on cash flow when planning and monitoring finances. You should establish short- and longterm financial goals (destinations) and develop personal financial plans (road maps) that will guide their achievement. Cash flows and financial plans are as important for individuals as for corporations. | Chapter 3 Cash Flow and Financial Planning Learning Goals Understand tax depreciation procedures and the effect of depreciation on the firm’s cash flows. Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) plans. Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget. Learning Goals (cont.) Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet. Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements. Analyzing the Firm’s Cash Flows Cash flow (as opposed to accounting “profits”) is the primary focus of the financial manager. An important factor affecting cash flow is depreciation. From an accounting perspective, cash flow is summarized in a firm’s . | Chapter 3 Cash Flow and Financial Planning Learning Goals Understand tax depreciation procedures and the effect of depreciation on the firm’s cash flows. Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) plans. Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget. Learning Goals (cont.) Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet. Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements. Analyzing the Firm’s Cash Flows Cash flow (as opposed to accounting “profits”) is the primary focus of the financial manager. An important factor affecting cash flow is depreciation. From an accounting perspective, cash flow is summarized in a firm’s statement of cash flows. From a financial perspective, firms often focus on both operating cash flow, which is used in managerial decision-making, and free cash flow, which is closely monitored by participants in the capital market. Depreciation Depreciation is the systematic charging of a portion of the costs of fixed assets 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. Depreciation: Depreciation & Cash Flow Financial managers are much more concerned with cash flows rather than profits. To adjust the income statement to show cash flows from operations, all non-cash charges should be added back to net profit after taxes. By lowering taxable income, depreciation and other non-cash expenses create a tax shield and enhance cash flow. Depreciation: Depreciable Value & Depreciable Life Under the basic .