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FIN300 ch 3

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Ryerson University
FIN 300
Cynthia Holmes

Chapter 3 Sources and Uses of Cash Sources o Cash inflowoccurs when we sell something o Decrease in asset account o Increase in liability or equity accountUses o Cash outflowoccurs when we buy something o Increase in asset accountDecrease in liability or equity accountStatement of Cash FlowsStatement that summarizes the sources and uses of cashChanges divided into three major categories o Operating Activityincludes net income and changes in most current accounts o Investment Activityincludes changes in fixed assets o Financing Activityincludes changes in notes payable longterm debt and equity accounts as well as dividendsQuick Quiz 1 What is the difference between book value and market valueWhich should we use for decision making purposes 2 What is the difference between accounting income and cash flow Which do we need to use when making decisions 3 What is the difference between average and marginal tax rates Which should we use when making financial decisions 4 How do we determine a firms cash flowsWhat are the equations and where do we find the information 5 What is CCAHow is it calculatedWhat is the CCA in year 1 and 2 if the original cost is 44000 and the rate is 10Answer2200 in year 1 and 4180 in year 2Accounting Abbreviations CL AR CA AP LT CSChapter 4 Longterm financial planning and corporate growthMaking financial statements FOR THE FUTURE anticipate future problemsConsider the goals of the firm establish guidelines for growth and changeExamining interactionshelps management see the interactions between decisionsExploring optionsgives management a systematic framework for exploring its opportunitiesAvoiding surpriseshelps management identify possible outcomes and plan accordinglyEnsuring feasibility and internal consistencyhelps management determine if goals can be accomplished and if the various goals of the firm are consistent with one anotherWay to communicate firms ideas to investors lenders regulators and othersFinancial Planning Process Planning Horizondivide decisions into shortrun decisions usually next 12 months and longrun decisions usually 25 yearsAggregationcombine capital budgeting decisions into one big project o Basically financial managers need to decide how many years and how much detail is neededAssumptions and scenarios o Make realistic assumptions about important variables o Run several scenarios where you vary the assumptions by reasonable amounts o Determine at least a worst case normal case and best case scenario Financial Planning ModelSix Main Ingredients 1 Sales Forecastmany cash flows depend directly on the level of sales often estimated using a growth rate in sales 2 Pro Forma Statementssetting up the financial plan in the form of projected financial statements allows for consistency and ease of interpretation 3 Asset Requirementshow much additional fixed assets will be required to meet sales projections 4 Financial Requirementshow much financing will we need to pay for the required assets 5 Plug Variable Cash shortfall or surplusmanagement decision about what type of financing will be used to make the balance sheet balance 6 Economic Assumptionsexplicit assumptions about the coming economic environment In the simple approach alternative A we increased sales by 20 and then everything else by 20 as well o In the simple approach alternative B we increased sales by 20 then everything else on the income statement by 20 and all assets by 20 then used the righthand side of the balance sheet to reconcileBut now we need to consider more seriously the following question o If sales increase by 20 then what else should increase by the same amount and what should be considered more carefully Percent of Sales Approach Some items tend to vary directly with sales while others do notIncome Statement o Costs may vary directly with sales
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