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41 Cards in this Set
- Front
- Back
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Depreciation |
A portion of the costs of fixed assets charged against annual revenues over time Deductions increase a firm's cash flow because they reduce a firm's tax bill |
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Modified accelerated cost recovery system (MACRS) |
System used to determine the depreciation of assets for tax purposes |
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Depreciable life |
Time period over which an asset is depreciated |
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Recovery period |
The appropriate depreciable life of a particular asset as determined by MACRS |
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3 year recovery period |
Research equipment and certain special tools |
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5 year recovery period |
Computers, printers, copiers, duplicating equipment, cars, light-duty trucks, qualified technological equipment, and similar assets |
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7 year recovery period |
Office furniture, fixtures, most manufacturing equipment, railroad track, and single-purpose agricultural and horticultural structures |
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10 year recovery period |
Equipment used in petroleum refining or in the manufacture of tobacco products and certain food products |
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Financial reporting purposes |
Companies can use a variety of depreciation methods |
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Tax purposes |
Assets in the first four MACRS property classes are depreciated by the double-declining balance method, using a half-year convention and switching to a straight-line when advantageous |
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Three categories of a firm's cash flows |
Cash flow from operating activities Cash flow from investment activities Cash flow from financing activities |
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Cash flow from operating activities |
Cash flows directly related to sale and production of the firm's products and services |
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Cash flow from investment activities |
Cash flows associated with purchase and sale of both fixed assets and equity investments in other firms |
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Cash flow from financing activities |
Cash flows that result from debt and equity financing transactions Include incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends |
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Inflows of cash (sources) |
Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other noncash charges Sale of stock |
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Outflows of cash (uses) |
Increase in any asset Decrease in any liability Net loss after taxes Dividends paid Repurchase or retirement of stock |
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Noncash charge |
An expense that is deducted on the income statement but does not involve the actual outlay of cash during the period Includes depreciation, amortization, and depletion |
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Operating cash flow (OCF) |
The cash flow a firm generates from its normal operations Calculated as net operating profits after taxes (NOPAT) plus depreciation |
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Net operating profits after taxes (NOPAT) |
A firm's earnings before interest and after taxes |
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Free cash flow (FCF) |
The amount of cash flow available to investors (creditors and owners) after the firm has met all operating needs and paid for investments in net fixed assets and net current assets
OCF - NFAI (or NCAI) |
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Net fixed asset investment (NFAI) |
The net investment the firm makes in fixed assets Refers to purchases minus sales of fixed assets
Change in net fixed assets plus depreciation
Change in gross fixed assets from one year to the next |
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Net current asset investment (NCAI) |
The net investment made by the firm in its current (operating) assets
Change in current assets - Change in (accounts payable plus accruals) |
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Cash planning |
Preparation of the firm's cash budget Useful for internal financial planning Routinely required by existing and prospective leaders |
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Profit planning |
Preparation of pro forma statements Useful for internal financial planning Routinely required by existing and prospective leaders |
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Financial planning process |
Planning that begins with long-term, or strategic, financial plans that in turn guide the formulation of short-term, or operating, plans and budgets |
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Long-term (strategic) financial plans |
Plans that lay out a company's planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years
Research and development activities Marketing and product development activities Capital structure Major sources of financing |
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Short-term (operating) financial plans |
Specify short-term financial actions and the anticipated impact of those actions
Operating budgets Cash budget Pro forma financial statements |
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Cash budget (cash forecast) |
A statement of the firm's planned inflows and outflows of cash that is used to estimate its short-term cash requirements
Often presented on a monthly basis |
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Sales forecast |
The prediction of the firm's sales over a given period, based on external and/or internal data Used as the key input to the short-term financial planning process |
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External forecast |
A sales forecast based on the relationships observed between the firm's sales and certain key external economic indicators |
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Internal forecast |
A sales forecast based on a buildup, or consensus, of sales forecasts through the firm's own sales channels |
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Total cash receipts |
All of a firm's inflows of cash during a given financial period |
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Total cash disbursements |
All outlays of cash by the firm during a given financial period Cash purchases Payments of accounts payable Rent and lease payments Wages and salaries Tax payments |
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Net cash flow |
The mathematical different between the firm's cash receipts and its cash disbursements in each period |
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Ending cash |
The sum of the firm's beginning cash and its net cash flow for the period |
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Required total financing |
Amount of funds needed by the firm if the ending cash for the period is less than the desired minimum cash balance Typically represented by notes payable |
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Excess cash balance |
The (excess) amount available for investment by the firm if the period's ending cash is greater than the desired minimum cash balance Assumed to be invested in marketable securities |
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Pro forma statements |
Projected, or forecast, income statements and balance sheets |
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Percent-of-sales method |
A simple method for developing the pro forma income statement It forecasts sales and then expresses the various income statement items as percentages of projected sales |
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Judgmental approach |
A simplified approach for preparing the pro forma balance sheet under which the firm estimates the values of certain balance sheet accounts and uses its external financing as a balancing, or "plug," figure |
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External financing required ("plug" figure) |
Under the judgmental approach for developing a pro forma balance sheet, the amount of external financing needed to bring the statement into balance It can be either a positive or a negative value |
