Chapter 10 Incremental Cash FlowThree Financial StatementsSlide 3Slide 4Slide 5Fundamental Accounting RelationshipSlide 7Cash Flow Identity to Sources and Uses of CashEstimating Incremental Cash FlowCapital Spending and DepreciationSlide 11Disposal of Capital EquipmentProjected Cash Flow for ProjectProblemsChapter 10Chapter 10Incremental Cash FlowIncremental Cash FlowThree Financial StatementsThree Financial StatementsFundamental Accounting RelationshipFundamental Accounting RelationshipCash Flow Identity to Sources and UsesCash Flow Identity to Sources and UsesEstimating Incremental Cash FlowEstimating Incremental Cash FlowCapital Spending and DepreciationCapital Spending and DepreciationDisposal of Capital EquipmentDisposal of Capital EquipmentProjected Cash Flow for ProjectProjected Cash Flow for ProjectThree Financial StatementsThree Financial StatementsIncome Statement – Measure of Income Statement – Measure of performance over a specific timeperformance over a specific timeStatement of Financial Position or Balance Statement of Financial Position or Balance Sheet – Listing of all assets, liabilities, and Sheet – Listing of all assets, liabilities, and ownership claimsownership claimsSources and Uses of Cash or Statement Sources and Uses of Cash or Statement of Cash Flow – Where dollars came from of Cash Flow – Where dollars came from and where dollars were spentand where dollars were spentThree Financial StatementsThree Financial StatementsIncome Statement bottom line is net Income Statement bottom line is net incomeincomeNet income is not cash flowNet income is not cash flowAccrual Accounting – timing of cash and Accrual Accounting – timing of cash and recording of economic transaction differentrecording of economic transaction differentNoncash items – depreciation for exampleNoncash items – depreciation for exampleWant operating cash flow (OCF)Want operating cash flow (OCF)Use modified income statementUse modified income statementInterest expense is not part of OCFInterest expense is not part of OCFThree Financial StatementsThree Financial StatementsThe Balance Sheet CategoriesThe Balance Sheet CategoriesCash AccountCash AccountKey element is change in cash over the periodKey element is change in cash over the periodCash includes money, checking accounts, etc.Cash includes money, checking accounts, etc.Working Capital AccountsWorking Capital AccountsCurrent Assets and Current LiabilitiesCurrent Assets and Current LiabilitiesAssets and Liabilities typically converted to cash or paid over Assets and Liabilities typically converted to cash or paid over the business cyclethe business cycleLong-Term DebtLong-Term DebtOwner’s AccountsOwner’s AccountsSnapshot of company at a specific point in timeSnapshot of company at a specific point in timeThree Financial StatementsThree Financial StatementsStatement of Cash Flow or Sources and Uses of Statement of Cash Flow or Sources and Uses of CashCashCash flow from business operationsCash flow from business operationsCash flow from financingCash flow from financingFrom Owners (residual claims)From Owners (residual claims)From Lenders (fixed claims)From Lenders (fixed claims)Cash flow for capital spendingCash flow for capital spendingPurchase of capital equipmentPurchase of capital equipmentRecapture cash from sale of assetsRecapture cash from sale of assetsTies to the change in Cash Account over the Ties to the change in Cash Account over the periodperiodFundamental Accounting Fundamental Accounting RelationshipRelationshipAccounting Identity in two formsAccounting Identity in two formsAssets Assets ≡ Liabilities + Owner’s Equity≡ Liabilities + Owner’s EquityCash Flow from Assets ≡ Cash Flow to Cash Flow from Assets ≡ Cash Flow to Creditors + Cash Flow to OwnersCreditors + Cash Flow to OwnersBuilding the Cash Flow IdentityBuilding the Cash Flow IdentityCash Flow from Assets = Operating Cash Cash Flow from Assets = Operating Cash Flow – Increases in Net Working Capital – Flow – Increases in Net Working Capital – Increases in Capital SpendingIncreases in Capital SpendingWork through components, pages 269-271Work through components, pages 269-271Fundamental Accounting Fundamental Accounting RelationshipRelationshipContinued Building the Cash Flow IdentityContinued Building the Cash Flow IdentityCash Flow to CreditorsCash Flow to CreditorsInterest paid on debt – shows up in this section not Interest paid on debt – shows up in this section not in operating cash flowin operating cash flowAny repayment of principal on debt claimsAny repayment of principal on debt claimsCash Flow to OwnersCash Flow to OwnersDividend PaymentsDividend PaymentsAny retirement of common stockAny retirement of common stockIncreases in debt or common stock are Increases in debt or common stock are cash flow from owners or creditorscash flow from owners or creditorsCash Flow Identity to Cash Flow Identity to Sources and Uses of CashSources and Uses of CashOnce the components of the cash flow identity Once the components of the cash flow identity are calculated…are calculated…Convert the information into the Statement of Cash Convert the information into the Statement of Cash Flow or Sources and Uses of CashFlow or Sources and Uses of CashThe change in the cash account is the “bottom line” of The change in the cash account is the “bottom line” of this statementthis statementThree CategoriesThree CategoriesOperating ActivitiesOperating ActivitiesInvesting ActivitiesInvesting ActivitiesFinancing ActivitiesFinancing ActivitiesEstimating Incremental Cash FlowEstimating Incremental Cash FlowObjective – Estimate future cash flow of a Objective – Estimate future cash flow of a project (for decision making)project (for decision making)Only Incremental Cash Flow used in decisionOnly Incremental Cash Flow used in decisionSunk Costs – Do not useSunk Costs – Do not useErosion Costs – Must account for lost sales of old Erosion Costs – Must account for lost sales of old products when new product introducedproducts when new product introducedWorking Capital – new projects require working Working Capital – new projects require working capital, must include in cash flowcapital, must include in cash flowCapital Expenditures
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