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 process (short-term
and long-term)
• Cash-planning process (cash budget)
• The pro forma income statement
• The pro forma balance sheet
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
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
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)
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.
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
Exercise 3 - 3
• Determine OCF
• Sales of $2,500,000
• Cost of goods sold $ 1,800,000
• Operating expenses $300,000
• Depreciation expenses $200,000
• Tax rate 35%
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
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
Exercise 3 – 4 Solution
• FCF = OCF - NFAI - NCAI
• NFAI = change in fixed assets + depreciation
• NFAI = $300,000 + $200,000 = $500,000
• NCAI = change in current assets - change in
(acc. payable + accruals)
• NCAI = $150,000 - $75,000 = $75,000
• OCF = $700,000
• FCF = $700,000 - $500,000 - $75,000 =
$125,000
Exercise 3 - 5
• Estimate net profits before taxes
• Sales forecast of $650,000
• Fixed costs of $250,000
• Variable costs 35% of Sales
• Operating expenses include fixed costs of
$28,000 and variable costs 7,5% of sales
• Interest expenses are $20,000
Exercise 3 – 5 Solution
Problem 3 - 2
• Accounting cash flow
• Earnings after taxes $50,000
• Depreciation $28,000
• Amortization $2,000
• What was the firms accounting cash flow
from operations?
Problem 3 – 2 Solution
• Earnings after taxes $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.
Problem 3 - 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
• Current assets $120,000
• Interest expense $15,000
• Sales revenue $400,000
• Inventory $70,000
• Total cost before deprec., int. and tax $290,000
• Tax rate on ordinary income 40%
Problem 3 – 4 Solution
Problem 3 - 5
Problem 3 – 5 Solution
Problem 3 - 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 other
half is collected evenly over next 2 months
• What are firms expected cash receipts for
June, July and August?
• Use Excel sheet (Problem 3-7.xlsx)
Problem 3 – 7 Solution
Problem 3 - 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 (Problem 3-8.xlsx)
Problem 3 – 8 Solution
Problem 3 - 14
• Pro forma income statement
• Use the percent of sales method to
prepare a pro forma income statement
• Use fixed and variable cost data to
develop a pro forma income statement
• Use Excel sheet (Problem 3-14.xlsx)
Problem 3 – 14 Solution a)
Problem 3 – 14 Solution b)
•Using fixed and
variable costs higher
profit is projected
• Percent of sales
method is more
conservative, but
fixed and variable
costs method is more
accurate
Problem 3 - 17
• Pro forma balance sheet
• Analyze expected performance and
financing needs for 2008 - 2yrs ahead
• Prepare pro forma balance sheet dated
Dec. 31. 2008
• Discuss the financing changes suggested
by the statement prepared
• Use Excel sheet (Problem 3-17.xlsx)
Problem 3 – 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