Cash flows are the finances a corporation acquires from its daily sales and spends it in the operations of the business at that particular period. It is the liquidity position of the company and does not constitute for sales credit (Mulford & Comiskey, 2005). …
Moreover, it involves financial instruments such as inventory, which the corporation can easily convert into money. The cash flow statement can highlight the economic position of the firm and its solvency capacity within that financial period. Alternatively, the accounting profits refer to the gain or loss of the investment of the entrepreneur after the accumulative revenues are subtracted from the expenses (Profit ? = Revenues – Expenses). In addition, the net income is for the whole year (Wayman, 2010). For most corporations, revenues are realized when the money is earned but not received. This means some items can be sold on credit and recorded on the Income Statement as sales even if the money is not actually received. Why Caledonia has to adopt free Cash flows approach and not Accounting profit approach According to Mulford & Comiskey (2005), both the cash flow methods and accounting profits are methods that corporations use to assess their economic performance. However, the concepts of computing these two formulas are different and constitutes of different elements. Cash flows have several qualities that make it preferable than the accounting profits. First, cash flows consider the time value of transactions and money, which is important for the business. It considers the money value in a particular period has a different purchasing power than in a future period. Clearly, numerous economic conditions influence the fluctuation of prices and the accounting profits do not consider this. They assume the price remains constant for a particular economic period. For example, oil prices are affected by global factors such as depletion of oil wells, shortages or regulations, which cause the frequent alteration of the prices to meet the contemporary financial situations. In this instance, the cash flow approach will realize the inflows and expenditures of the new prices of the commodity according to the time of occurrence. Whereas the accounting profit model ignores this and uses the average price of the year in computing its revenues. Therefore, the corporation will be able to measure their liquidity situation more efficiently and thus this will help them in planning their operational functions better. Besides the cash flow model emphasizes real time payment unlike accounting profit is realized later ((Mulford & Comiskey, 2005)). If the corporation acquires finances directly after sales, they can use it when a great opportunity arises. They will not have to postpone their prospects since they have sold items on credit and do not have the actual money. Secondly, the accounting profit approach considers depreciation as an expense item and this is not an actual expense item (Mulford & Comiskey, 2005). Therefore, if the depreciation increases this will mean that the expenses will increase but this is not reflective of the true expense of the business. It is a non-cash amount that the corporation assumes it affects the profitability of the business. However, the cash flows ignore depreciation as cash expense since it does not have a monetary value. If Caledonia utilizes the cash flow approach, its profits will be higher and reflect the true cash position of the business, unlike a net profit figure which will be lower since it comprises of depreciation. Finally, the cash flow method is essential for capital budgeting which requires comparison of the benefits and costs (outflows) of the investment they are taking (Wayman, 2010). Since the cash flow method considers the cash values of the projects, it can be an appropriate basis to calculate the financial progress of the investment. Consequently, the accounting method disregards the cost at the time of initiation of the project. The ...
Cite this document
(“Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Math Problem”, n.d.)
Retrieved from https://studentshare.net/finance-accounting/69267-week
(Why Caledonia Has to Adopt Free Cash Flows Approach and Not Accounting Math Problem)
“Why Caledonia Has to Adopt Free Cash Flows Approach and Not Accounting Math Problem”, n.d. https://studentshare.net/finance-accounting/69267-week.
As the capital expenditure is marked in negative, the NPV is computed by adding the Capital Expenditure to the summation of the PVs of the ten cash flows.
The deduction of the capital expenditure value from the summation of the above mentioned PVs gives us the project’s NPV which is equal to 57.
The plan is to keep aside an equal amount on each of the birthday and put the same into the person’s savings account. Such annual payment of fixed amount of money over a phase of time is known as annuity. The two distinct types of annuity payments are ‘normal annuity’ where the periodical payments are done at the end of the period and annuity due and that of ‘immediate annuity’ where the payments are made at the very commencement of the period.
For example, a metal fabrication press, which bends and shapes metal, was bought seven years ago for $522,000. The company will add l9 percent to this cost, representing the change in the wholesale price index over the seven years. This new, higher cost figure is depreciated using the straight-line method over the same l2-year assumed life (no salvage value).
As this investment would be required in some future time, therefore the future value of the investment will be calculated. Future value shows the future worth of the money invested today after some specific period of time (Ross, Westerfield, and Jordan, 2009).
The company also risks uneven cash flow as a result of bad weather, which slows down construction schedules. The company will experience challenges due to increases of prices and shortage of major raw materials used in the manufacturing of building materials; this exposes the company to the risk of running out of supplies and ultimate reduction in profit margin.
According to accounting concepts, as long as business is going concern it should state all its assets on book value rather than on NRV. This means that since we have no intention of closing down, we are going to write it down at the book value, regardless of what our NRV is.
Activity Based Costing encourages managers to watch activities or functions that are value added . These are operational acts that help identify the activities or functions that get customers. Management should study cost drivers in decision making.
Advertising expense has been classified as discretionary cost as it is among the expenses that are fixed but can be altered in the short term by current management decisions. For example, the company can reduce its cost by spending less on advertising or going for a less expensive option in a budget year.
The co-ordinates of A and B are (5250000, 5250000) and (6, 6) respectively. The value of the objective function at these points is 0.45 X 5250000 = 2362500 and 2.7 respectively. The value of the objective function at the points of ray AD beyond point A would be 0.2x + 0.25(10500000 - x) i.e.
The balance sheet showed that the assets of the company increased with the despite of increasing sales. Cash decreased because the company sold more of their products on credit rather than on cash, which can be observed by the growing number of Account receivables which manifested a figure of $0.632 million FY 2007, which were $0.35 million a year before.
8 Pages(2000 words)Math Problem
GOT A TRICKY QUESTION? RECEIVE AN ANSWER FROM STUDENTS LIKE YOU!
Let us find you another Math Problem on topic Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach for FREE!