Cash Flow and Financial Planning
1. Understand tax depreciation procedures
and the effect of depreciation on the firm’s cash flows.
2. Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow.
3. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) plans.
4. Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget.
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Learning Goals (cont.)
5. Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet.
6. Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements.
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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.
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• 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.
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