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Tutorial Chapter III Cash Flow and Financial Planning

Tutorial Chapter III Cash Flow and Financial Planning. Cash Flow and Financial Planning - Goals. Tax depreciation procedures The firm’s statement of cash flows Financial planning proces s (short-term and long-term) Cash-planning process (cash budget) The pro forma income statement

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Tutorial Chapter III Cash Flow and Financial Planning

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  1. Tutorial Chapter III Cash Flow and Financial Planning

  2. Cash Flow andFinancial Planning - Goals Tax depreciation procedures The firm’s statement of cash flows Financial planning process (short-term and long-term) Cash-planning process (cash budget) The pro forma income statement The pro forma balance sheet

  3. Depreciation = systematic charging of a portion of costs of Fixed Assets against revenues over time. • The amount is determined by using Modified Accelerated Cost Recovery System (MACRS) • Depreciable value • Depreciable life

  4. Statement of CF • Summarizes the firm‘s CF over a given period of time CF is divided into - operating flows - investment flows - financing flows Inflows – Decrease in A, Increase in Liab., EAT, Depreciation, Sale of stock Outflows – Inc. in A, Dec. in Liab., Net loss, Dividends paid, Repurchase of stock

  5. Formulas CF from operations = EAT + Depreciation Operating CF = EBIT*(1-T) + Depreciation = NOPAT + Depreciation FCF = OCF – NFAI – NCAI NFAI = Change in net fixed A + Depreciation NCAI = Change in current A – Change in (accounts payable + accruals)

  6. Financial planning process Long-term financial plans – cover a 2 to 10 years period, Strategic decisions Short-term financial plans – cover 1 to 2 years period, Operating financing Cash Budget = a statement of a firm‘s planned inflows and outflows of cash. As a basis is used the sales forecast provided by the marketing department.

  7. Financial planning process Profit planning – Pro-Forma Statements Pro-Forma Statements = projected income statements and balance sheets, two inputs are needed - the sales forecast and the financial statements for the preceding year. Preparing Pro-Forma Income Statement – percent-of-sales method Preparing Pro-Forma Balance Sheet – judgmental approach

  8. Exercise 3 - 3 Determine OCF Sales of $2,500,000 Cost of goods sold $ 1,800,000 Operatingexpenses $300,000 Depreciationexpenses $200,000 Tax rate 35%

  9. Exercise 3 – 3 Solution OCF = [EBIT * (1-t)] + Depreciation EBIT = $2,500,000 - $1,800,000 - $300,000 = $400,000 OCF = [$400,000 * (1 - 0.35)] + $200,000 = $460,000

  10. Exercise 3 - 4 Calculate FCF Increase in fixed assets $300,000 Depreciation$200,000 Increase in current assets $150,000 Increase in accounts payable $75,000 OCF was $700,000

  11. Exercise 3 – 4 Solution FCF = OCF - NFAI - NCAI NFAI = change in fixed assets + depreciation NFAI = $300,000 + $200,000 = $500,000 NCAI = change in currentassets - changein (acc. payable + accruals) NCAI = $150,000 - $75,000 = $75,000 OCF = $700,000 FCF = $700,000 - $500,000 - $75,000 = $125,000

  12. Exercise 3 - 5 Estimate net profits before taxes Sales forecastof $650,000 Fixedcostsof $250,000 Variable costs 35% of Sales Operating expenses include fixed costs of$28,000 and variable costs 7,5% of sales Interestexpenses are $20,000

  13. Exercise 3 – 5 Solution

  14. Problem3 - 2 Accounting cash flow Earningsaftertaxes $50,000 Depreciation$28,000 Amortization$2,000 What was the firms accounting cash flowfromoperations?

  15. Problem3 – 2 Solution Earningsaftertaxes $50,000 Plus: Depreciation $28,000 Plus: Amortization $ 2,000 Cash Flow from operations $80,000 Note: Deprec. and Amor. are non-cash charges. Depreciation is charged against tangible assets, amortization is charged against intangible assets.

  16. Problem3 - 4 Depreciation and accounting Cash Flow Asset original cost of $180,000 has a 5-year MACRS recovery period, now in 3rd year(19%) Accruals$15,000 Currentassets $120,000 Interestexpense $15,000 Sales revenue $400,000 Inventory$70,000 Total cost before deprec., int. and tax $290,000 Tax rate on ordinary income 40%

  17. Problem3 – 4 Solution

  18. Problem3 - 5

  19. Problem3 – 5 Solution

  20. Problem3 - 7 Cash receipts Sales of $65,000 in April, $60,000 in May Sales of $70,000 in June, $100,000 in July and in August Half of sales are for cash and the otherhalf is collected evenly over next 2 months What are firms expected cash receipts for June, July and August? Use Excel sheet (Problem3-7.xlsx)

  21. Problem3 – 7 Solution

  22. Problem3 - 8 Cash disbursement schedule for April, May and June Sales from February: $500,000 $500,000 $560,000 $610,000 $650,000 $650,000 Purchases: 60% of next month’s sales, 10% in cash, 50%after 1 month, 40% after 2 month Rent: $8,000 per month Wages and Salaries: Fixed $6,000/month + 7% of sales Taxes: $54,500 due in June Fixed asset outlays: New equipment in April for $75,000 Interest payments: A payment of $30,000 is due in June Cash dividends: $12,500 will be paid in April Principal payments and retirements: None Use Excel sheet (Problem3-8.xlsx)

  23. Problem3 – 8 Solution

  24. Problem3 - 14 Pro forma incomestatement Use the percent of sales method toprepare a pro forma income statement Use fixed and variable cost data todevelop a pro forma income statement Use Excel sheet (Problem 3-14.xlsx)

  25. Problem3 – 14 Solution a)

  26. Problem3 – 14 Solution b) • Usingfixedandvariablecostshigher profit isprojected • Percentofsalesmethodis more conservative, butfixed and variablecostsmethod is more accurate

  27. Problem3 - 17 Pro forma balance sheet Analyzeexpected performance andfinancing needs for 2008 - 2yrs ahead Prepare pro forma balance sheetdatedDec. 31. 2008 Discuss the financing changes suggested by thestatementprepared Use Excel sheet (Problem 3-17.xlsx)

  28. Problem3 – 17 Solution Company must arrange for additional financing of at least $775,000 over the next two years based on the given constraints and projections

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