UNIVERSITY OF THE PHILIPPINES Extension Program in Pampanga BM 141: Business Finance I Principles of Managerial Finance 13e by L.J. Gitman & C. J. Zutter Chapter 4: Cash Flow and Financial Planning Learning Goals: highlight the most important concepts and techniques in the chapter; goals must be achieved upon reporting the chapter 1. Understand tax depreciation procedures and the effect of depreciation on the firm’s cash flows. 2. Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow. 3. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) financial plans. 4. Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget. 5. Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet. 6. Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements. The Outline: guides the reporters for the in-depth topics assigned to them I. II.
Introduction to the Chapter: Why This Chapter Matters To You Analyzing the Firm’s Cash Flow A. Depreciation (define the term, explain the concept of depreciation deductions, depreciation value of an asset, depreciable life, recovery period – search for the depreciation method used in the Philippines and provide some local examples) B. Depreciation Methods (differentiate the methods used between financial reporting and tax reporting, provide local examples) C. Developing the Statement of Cash Flows (determine the components of cash flows, classify the inflows and outflows of cash, provide examples for the inflows and outflows, show the preparation of statements of cash flows and provide a local example, show how to interpret the statement) D. Free Cash Flow (the operating cash flow – concept, definition and computation, the free cash flow-concept, definition, purpose, and computations, provide local examples)
III.
The Financial Planning Process A. Long-Term (Strategic) Financial Plans (define terms and concepts, provide examples) B. Short-Term (Operating) Financial Plans (define terms and concepts, provide examples,
IV.
Cash Planning: Cash Budgets A. The Sales Forecast (define terms and concepts, basis of sales forecast) B. Preparing the Cash Budget (cash receipts – define and provide local examples, cash
explain the planning process – use the chart provided)
disbursements – define and provide local examples, the net cash flow, ending cash, and excess cash – interpretation of the results, provide local examples) C. Evaluating the Cash Budget (interpretation of data) D. Coping with Uncertainty in the Cash Budget (what-if analysis, risk factors, simulation)
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E.
Cash Flow within the Month (explain why the financial manager needs to plan and monitor
V.
cash flow more frequently than on monthly basis) Profit Planning: Pro Forma Statement (provide a local example)
VI.
A. Preceding Year’s Financial Statements B. Sales Forecast Preparing the Pro Forma Income Statement (percent-of-sales method – explain the problem
VII.
VIII.
using this method and the best way to adjust to those problems, considering types of costs and expenses, provide local examples) Preparing the Pro Forma Balance Sheet (provide a local example, judgmental approach, explaining the “plug” figure) Evaluation of Pro Forma Statements (weaknesses of simplified approaches, the financial manager’s objective in evaluating pro forma statements)
Rules regarding the report 1. All examples must be localized (Philippine setting), if applicable. 2. The power point presentation must not be wordy – must only contain key words or phrases so that the reporter is encouraged to review his/her report thoroughly. 3. Cite your references. Timeline Date (2015) Feb. 3 (Tues) Feb. 4 (Wed) Feb. 5 (Thu) Feb. 6 (Fri) Feb. 7 (Sat)
Agenda Meeting with group mates to discuss the chapter and rules regarding the report; distribution of the report Allotted time to do his/her report Submission of report (around 7 PM) Questions regarding the report; polishing and finalizing the report; preparation of the reporters Report day
Additional References Accounting Principles 10e by Weygandt, Kimmel, and Kieso – can be used for the statement of cash flows and other cash flow related concepts Managerial Accounting by Mowen, Hansen, and Heitger – can be used for the cash and financial planning concepts and processes Others 1. A summary of Chapter 4 is provided in pdf format. The summary includes all of the concepts in the said chapter. 2. Power point presentation of the Chapter 4 from Pearson Education is also provided to aid you from your report. 3. Summaries of related chapter from the additional references are also provided in pdf format. Prepared by: Nikko Dave C. Cayanan 2012-04650
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