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Paer Story

In: Business and Management

Submitted By bjsherrod
Words 5923
Pages 24
Chapter 4
Cash Flow and Financial Planning

( Instructor’s Resources


This chapter introduces the student to the financial planning process, with the emphasis on short-term (operating) financial planning and its two key components: cash planning and profit planning. Cash planning requires preparation of the cash budget, while profit planning involves preparation of a pro forma income statement and balance sheet. The text illustrates through example how these budgets and statements are developed. The weaknesses of the simplified approaches (judgmental and percent-of-sales methods) of pro forma statement preparation are outlined. The distinction between operating cash flow and free cash flow is presented and discussed. Current tax law regarding the depreciation of assets and the effect on cash flow are also described. The firm’s cash flow is analyzed through classification of sources and uses of cash. The student is guided in a step-by-step preparation of the statement of cash flows and the interpretation of this statement. This chapter ties in every person’s need to set goals, estimate income, and budget expenditures to the firm’s need to effectively engage in these activities.

( Answers to Review Questions

1. The first four classes of property specified by the MACRS system categorized by the length of the depreciation (recovery) period are called 3-, 5-, 7-, and 10-years property:

|Recovery Period |Definition |
|3 years |Research and experiment equipment and certain special tools |
|5 years |Computers, printers, copiers, duplicating equipment, cars, light-duty trucks, qualified |
| |technological equipment, and similar assets...

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