objectives better than two systems each maximizing one objective. If a single system is use for both decision management and decision control, trade-offs must be made to create a balance system that maximizes profits for the firm.
2. Do firms have multiple accounting systems? Why or why not?
Income | |
| Depreciation | + |
| Capital Expenditures | - |
| Change in NWC | - |
| Free CashFlow | |
Depreciation is not a cash expense that is paid by the firm. Rather, it is a method used for accounting and tax purposes. Because it is not a cashflow, wedo not include it in the...
’ financial statements. Ourfocus in this chapter is not on how accountants construct these statements (we leave that to your accounting professors). Instead, our goal is to illustrate why these statements are important to financial managers and why finance places so much emphasis on cashflowratherthan...
Accounting The focus of managerial accounting is on the needs of managers within the organization, ratherthaninterested parties outside the organization. In your financial accounting course, you learned to prepare the fundamental financial documents (Balance Sheet, Income Statement, Statement of Cash...
to budget for bookings, revenues, expenses, cashflow, and collections/ disbursements. CFOs are most confident budgeting expenses. The smaller the company, the more confident they are: 58% of companies with less than $10 million in revenue are “very confident” budgetingcashflow compared to only...
discounting cashflows. The simple rate of return is also known as the accounting rate of return or the unadjusted rate of return. Unlike the other capitalbudgeting methods that we have discussed, the simple rate of return method focuses on accounting net operating income ratherthancashflows. To obtain...
- over-reliance on the use of short payback periods;
- failure to include in the cashflows those benefits which are difficult to quantify.
These criticisms, however, have been based on anecdotal evidence ratherthan survey evidence.
We have already drawn attention to the fact that the...
the guidelines of the international harmonization of accounting standards.
1-Increasing the comparability of financial reports prepared in different countries and, thus, providing participants in international capital markets with better quality information for decisionmaking.
published company accounts and you will observe that current assets represent more than 50 per cent of total capital investment for a significant number.
3.5 CapitalBudgeting and Taxation
Another incrementalcashflow, which we haven’t touched on, that may involve timing discrepancies affecting...
f) a. Both projects would be accepted at a 7.2% cost of capital.
Chapter 11 Solutions
Answers to Review Questions
1. Whydowefocus on cashflows instead of profits when evaluating proposed capitalbudgeting projects?
Wefocus on cash...
initial investment in a building more valuable than a dollar of initial investment in land or working capital? Why are cashflows but not accounting earnings discounted in capitalbudgeting analyses?
Chapter 2 discussed opportunity cost as the benefit forgone from a specific...
. The incrementalflows from undertaking F ratherthan E are as follows:
CashFlows ($) Project F–E C0 –10,000 C1 15,000 IRR (%) 50 NPV at 10% 3,636
The IRR on the incremental investment is 50 percent, which is also well in excess of the 10 percent opportunity cost of capital. So you should...
Unless otherwise stated, for the sake of simplicity we will assume in this chapter that all cashﬂows other than the initial investment occur at the ends of years.
Emphasis on CashFlowsAccounting net income is based on accruals that ignore when cashﬂows...
…………………………………………………………………………..………52 Table 4.9: The use of capitalbudgeting sorted by company size…………………………….53
LIST OF FIGURE Figure 1Flow chart of the Capitalbudgeting process………………………………………..11
List of abbreviations ARR CF DCF DPB ERR IRR NPV PB PP WACC Accounting Rate of Return CashFlow Discounted Cash...
projects. Because cash, not accounting income, is central to all decisions of the ﬁrm, we express the beneﬁts we
expect to receive from a project in terms of cashﬂowsratherthan income ﬂows. Cashﬂows should be measured on an incremental, after-tax basis. In addition, our concern is...
the time value of money and
the value of cashflows beyond the cutoff date,
and the cutoff is usually arbitrary. Small firms used
FIGURE 1 SURVEY EVIDENCE ON THE POPULARITY OF DIFFERENT CAPITALBUDGETING METHODS*
*We report the percentage of CFOs who always or almost always use a particular...
the precise estimation of the benefits associated with it. The wealth maximisation criterion is based on the concept of cashflows generated by the decisionratherthanaccountingprofit which is the basis of the measurement of benefits in the case of the profit maximisation criterion. Cashflow is...