...Cash flow Cash flow is a revenue or expense stream that changes a cash account over a given period. It is one of the most important pieces of information that can be derived from financial statements. Cash flow is important because a positive net income on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statement data for learning about the generation of cash from operations is the statement of cash flows. Cash inflows usually arise from one of three activities, examples financing, operations or gifts in the case of personal finance. Cash inflow is things like customer receipts, dividends received and income tax refunds. Other example of cash inflow is proceeds from sales and casualty insurance proceeds. Also , proceeds from bond issuance and from loans. Statement of cash flows is an key financial statement in the accountancy industry. It was one of the four major financial statements needed by GAAP. The main purpose of statements of cash flows is to prepare relevant information on cash receipt and cash payment during a business. The statement shows why the cash in the period by reporting a net cash available or used by operating activities, investing activities, and financing activities. This paper discusses how to direct and indirect method of cash flow statement and will also discuss every part to get the cash flow statement and how it helped the various of different users...
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...just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years. Here are the projects’ net cash flows (in thousands of dollars): 0 1 2 3 | | | | Project L -100 10 60 80 Project S -100 70 50 20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted. A. What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions? Capital budgeting is the process of analyzing additions to fixed assets. capital budgeting is important because, more than anything else, fixed asset investment decisions chart a company’s course for the future. conceptually, the capital budgeting process is identical to the decision process used by individuals making investment decisions. these...
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...: Development Histories, Theories and Practices TITLE OF PAPER: Is Development the Real Output Expected of Cross-Border Financial Flows from Intermediaries? The role played by financing in the process of development cannot be addressed as either enhancing or undermining, because it could function as both depending on the global dynamics and internal structural differences within countries in a specific period of time. As seen through history, financing has showed that the combination of political and historical factors influence the resulting situation whether it is development or not reflected on its economic growth, by designing a unique path that later will have implications on social issues not being address at first. Depending on the initial situation and a clear idea of the expected results from an entering cash flow to the economy could influence to be a beneficial transference. The purpose of this essay is to discuss the dilemma on whether cross-border cash flows into a financial system increases or decreases economic growth translated somehow in industrialization, mostly from under a economic point of view that takes into consideration the macroeconomic policies, taking this factors as components of development; knowing that there are other social, cultural and political issues that are part of this process that while are not being approached entirely in this essay as poverty and inequality, are indirectly implied as part of the process. First I briefly present...
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...handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years. Here are the projects’ net cash flows (in thousands of dollars): 0 | -100 -100 1 | 10 70 2 | 60 50 3 | 80 20 Project L Project S Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted. A. What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions? Answer: [Show S11-1 through S11-3 here.] Capital budgeting is the process of analyzing additions to fixed assets. Capital budgeting is important because, more than anything else, fixed asset investment decisions chart a company’s course for the future. Conceptually, the capital budgeting process is identical to the decision process used by individuals making investment decisions....
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...Decision Making Information needs of different decision makers There are different types of parties interested in the information of the organization. According to their level of interest and the power they can be divided in to internal parties and the external parties. The information needs of them also differ according to their needs. Owners/ Shareholders: They can be categorized as internal parties and their information needed for decision making are listed below. • Profitability of the company • Profit attributable to shareholders • Organizations asset base/ payables or net worth • Availability of cash for future expansions Employees Employees are also internal parties but their purpose of getting the information about the organization is different compared to the owners’ interest. Employees are mainly concerned about their salaries and other benefits from the employment and the continuity of the business for the security of their work. They are interested in following financial information. • • Profitability of the company Future expansion Plans External Parties includes Lenders/ banks Government/ regulatory institutions Public/ customers Lenders: Lenders/ Banks seek more information about the company when lending money for them to expand or for operations. Usually banks look for following information; • Gearing ratio of the company(Ratio between the equity capital and loan capital) • Profitability • Liquidity of the company • Interest cover (Ability to pay...
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...How Your Company Really Works by Ram Charan Copyright © 2001 by Ram Charan. Published by arrangement with Crown Business, a division of Random House, Inc. 144 pages Focus Leadership & Mgt. Strategy Sales & Marketing Finance Human Resources IT, Production & Logistics Career Development Small Business Economics & Politics Industries Regions Concepts & Trends Take-Aways • Develop your "business acumen" by learning the essential forces that drive business. • The core of any business consists of customers, “cash generation, return on assets and growth.” • To prosper, your company must grow. Be sure it grows wisely. • Expanding sales must be accompanied by increases in other critical financial metrics. Otherwise, growth can cause bankruptcy. • Accompany growth with solid cash flow, steady speed and sensible margins. • Set no more than five clear priorities so the organization can focus. • Everyone from the sales force to the mailroom should understand cash flow. • Know your customers firsthand; don't rely on polls and surveys. • Seek employees who fit your culture and enable them to execute. Provide practical coaching and useful, specific feedback. • See the total picture. Understand all the forces at play and how they interrelate. Rating Overall (10 is best) Applicability Innovation Style 8 8 7 9 To purchase abstracts, personal subscriptions or corporate solutions, visit our Web site at www.getAbstract.com or call us at our U.S. office (954-359-4070)...
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...expanding into Asia. The financial analysis showed that a joint venture requires an €2 million investment, which could be funded by the shareholders offering a yield of return of 12%. Using the financial data provided and calculating the weighted average cost of capital and the Net Present Value, a WACC of 10% and a NPV of €2.051 million were the results, proving the worthiness of the investment into the joint venture. Before signing any agreements further research needs to be taken to evaluate non-financial aspects such as opportunity costs and other investments. The second part of the report deals with the re-domiciling of the parent company from France to Monaco. From a business perspective and logical point of view this step makes sense as a lot of business operations are being run in Monaco, but it could still damage the company’s image to move from France just for profit and also shareholders might not like the idea. Furthermore IFM Plc plans on expanding into Asia, especially China and India to achieve a growth of 5% over the next 5 years. This is a decision worth doing but bears high risks as a high investment of €250 million is needed and the company already has a gearing level of 88%. The report states several options to lower the gearing level and receive funding but it is still...
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...resources to reduce their spending on building roller blades the company would be saving itself more capital, therefore increasing it’s profit. 2. Some of the disadvantages Blades could face as a result of foreign trade are for one the company is in its infancy and it is a relatively small company. Since the company is in it’s infancy it might not be safe for it to start foreign trade for at least another two years, in this time the company would become more established and well known and have more capital. If it were to venture into foreign trade to Thailand, Blades could be exposed to international economic conditions and this could affect Blades cash flows in the long run. If conditions in Thailand weaken the consumers suffer a decrease in their income and their demand for Blades decreases. As this happens Blades cash flows would decrease. In the short run, Blades could also be affected by international political risks, such as tax increases in the foreign...
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...creates a structured step by step process that enables a company to develop and formulate long-term strategic goals, seek out new investment projects, estimate and forecast future cash flows, facilitate the transfer of information & lastly, monitor and control expenditures (Investopedia, 2014).” “Preparing a capital budget is also necessary in order to increase profits and minimize costs. Most businesses and organizations typically plan a budget for a 12-month period, which allows management to take a look at a bigger picture. A capital budget differs from a short-term budget in that it takes a look at long-term investments, examining the purchase or upgrade of fixed assets such as buildings, machinery and equipment (Ehow.com, 2014).” There are also many reasons to make hefty investments. One important intention is that it helps to expand the level of operations for a business or company. A growing company often needs to acquire new fixed assets in order to produce work in a timely fashion. Then as the company expands its level of operation, replacements will eventually need to be made to replace or renew obsolete or worn out assets. Capital budgeting is pertinent knowledge for a qualified financial manager. One duty of a financial manager is to choose investments with reasonable cash flows and rates of return. Some basic steps in the capital budgeting process are to identify potential opportunities....
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...where the cash flow to the firm will be received over a period longer than a year. Any corporate decisions with an impact on future earnings can be examined using this framework. Decisions about whether to buy a new machine, expand business in another geographic area, move the corporate headquarters to Cleveland, or replace a delivery truck, to name a few, can be examined using a capital budgeting analysis. For a number of good reasons, capital budgeting may be the most important responsibility that a financial manager has. First, since a capital budgeting decision often involves the purchase of costly long-term assets with lives of many years, the decisions made may determine the future success of the firm. Second, the principles underlying the capital budgeting process also apply to other corporate decisions, such as working capital management and making strategic mergers and acquisitions. Finally, making good capital budgeting decisions is consistent with management's primary goal of maximizing shareholder value. The capital budgeting process has four administrative steps: * Step 1: Idea generation. The most important step in the capital budgeting process is generating good project ideas. Ideas can come from a number of sources including senior management, functional divisions, employees, or outside the company. * Step 2: Analyzing project proposals. Since the decision to accept or reject a capital project is based on the project's expected future cash flows, a cash...
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...with present value calculations to support this proposal. Capital Budget Evaluation Techniques Various analytical methods exist to help business owners make wise capital investment decisions. Because there are many evaluation methods, it makes good business sense to apply the various techniques to the same proposal in order to obtain multiple perspectives (Edmonds, 2007). The Net Present Value (NPV) method which takes the time value of money into consideration, is the capital budget technique which focuses on increasing the value of the business. Using Guillermo’s project data, the marginal cash inflows are defined as the increase in net cash inflows compared to the current situation. Since we know the depreciation formula under the high tech option has a projected useful life of ten years, this is the period used for this analysis. Calculations are as follows: Current Situation High-Tech Option Annual Net Income (Pretax) $46,118 Annual Net Income (pretax) $213,175 + Depreciation 50,000 + Depreciation 466,667 - Income Taxes 19,370 - Income Taxes 89,534 Current Annual Cash Flow $76,748 High Tech Cash Flow $590,308 Broker Option Annual Net Income (Pretax) $335,226 + Depreciation 50,000 - Income Taxes 140,795 Broker...
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...Investment Decision Risk Analysis on Investment Decision Silicon Arts, Incorporated (SAI) is a manufacturer of circuits that are used in the manufacture of electronic equipment items. During their initial years in operation, there was an increase in the industry followed by a 40% decline. In order to remain competitive and stay profitable, SAI controlled expenses. Current trends indicate the industry may be on the rise again. SAI wants to develop some new capital investment projects that are in line with their goals: increase their market share, and keep pace with new technology (University of Phoenix, 2007). Future Scenarios The first task in the simulation was to examine probable future scenarios that could potentially affect SAI cash flow with two projects, Dig-image and W-Comm. Part of SAI’s plans is their desire to earn $54 million in their first year by selling 400,000 units, however they first need to determine their working capital. “Working capital rises over the early years of the project as expansion occurs. However, all working capital is assumed to be recovered at the end, a common assumption in capital budgeting” (Ross, Westerfield, & Jaffey, 2005, p. 183). SAI is expecting growth will be 20% in the first three years and then decrease 10% annually in years 4 and 5. SAI is expecting increasing competition, decreasing prices, and a short lifespan of the technology that could be obsolete before the lifespan of the project itself. Although increasing the volume...
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...Brief Introduction Indian River Citrus Company is a leading producer of fresh, frozen, and made-from-concentrate citrus drinks. Currently, the company has three projects which are introduction of a new product known as lite orange juice; two mutually exclusive projects, Project S and Project L; and a fleet of delivery trucks with an engineering life of three years. All projects have its advantages and drawbacks. Hence, capital budgeting for each project is made for decision-making purpose. Benefits and Drawbacks of each project Project 1: Introduction of lite orange juice The advantage of lite orange juice is that there are currently no similar products in the market. Orange juice offered in the current market is high in calorie and results many consumers reluctant to drink it. However, lite orange juice is 35% lesser calories. This product is not offered in the current market yet, hence the company is in a strong position to monopolize the lesser calories orange juice market. Furthermore, the second advantage is that it will utilize the section of the main plant which has been unused for several years and causing some deterioration. The utilization of the unused section will also remove the rehabilitation expense. Besides that, used machinery that would be purchased is inexpensive, and it would be depreciated under the MARCS 3-year class, which is a special tax ruling. Lastly, lite orange juice would reduce regular orange juice production costs by $20,000 per year, on a...
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...Corporate finance Suppose you decide to start a firm to make tennis balls. To do this, you hire managers to buy raw materials, and you assemble a workforce that will produce and sell finished tennis balls. In the language of finance, you make an investment in assets such as inventory, machinery, land, and labor. The amount of cash you invest in assets must be matched by an equal amount of cash raised by financing. When you begin to sell tennis balls, your firm will generate cash. This is the basis of value creation. The purpose of the firm is to create value for you, the owner. The firm must generate more cash flow than it uses. The value is reflected in the framework of the simple balance-sheet model of the firm. The Balance-Sheet Model of the Firm Suppose we take a financial snapshot of the firm and its activities at a single point in time. The assets of the firm are on the left-hand side of the balance sheet. These assets can be thought of as current and fixed. Fixed assets are those that will last a long time, such as buildings. Some fixed assets are tangible, such as machinery and equipment. Other fixed assets are intangible, such as patents, trademarks, and the quality of management. The other category of assets, current assets, comprises those that have short lives, such as inventory. The tennis balls that your firm has made but has not yet sold are part of its inventory. Unless you have overproduced, they will leave the firm shortly. Before a company...
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...For the purpose of decision making, two retailer companies featured in Fortune is the focus of this analysis. Fortune 100 best companies to work for ranks at 58 Recreational Equipment, INC., (REI) at (Fortune, 2015 Fortune 100 Best Companies to Work For®, 2015). Fortune 500 ranks 393 Dick’s Sporting Goods, INC. (Dick’s), (Fortune, Fortune 500, 2015) Decision making from an investor or leadership role explores reliable sources such as Fortune. Investment decision based on business practice influenced by business regulations are the investor's goal. Financial tools of ratios analysis used to determine profitability, liquidity, and solvency are used to evaluate performance. Ratio tools assist in the decision-making reasons for choosing to invest or not to do so. Annual Report Financial Statement The annual report introduces financial statement reports formatted for investor’s analysis. The main forms of interpretation include; Balance Sheet, Cash Flow, Income, Stockholders Equity or Member’s Equity. The Balance Sheet reports critical information of assets and liabilities to determine profitability, liquidity, and solvency. Specific tools used to analyze financial statements to make a meaningful evaluation of the report’s form are financial ratio classifications of; profitability ratios measures the operating success of a company for a given date period. Liquidity ratios measure a company’s short-term ability to pay obligations and its ability to meet cash needs. Solvency ratio reflects...
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