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Learning Goals
1. Understand the effect of depreciation on the firms cash flows, the depreciable value of an asset, its depreciable life, and tax depreciation methods. 2. Discuss the firms statement of cash flows, operating cash flows, and free cash flow. 3. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) plans.
Copyright 2003 Pearson Education, Inc.
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Learning Goals
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. Cite the weaknesses of the simplified approaches to pro forma statement preparation and the common uses of pro forma statements.
Copyright 2003 Pearson Education, Inc.
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Depreciation
Depreciation is the systematic charging of a portion of the costs of fixed assets against annual revenues over time. Depreciation for tax purposes is determined by using the modified accelerated cost recovery system (MACRS). A variety of other depreciation methods are often used for reporting purposes.
Copyright 2003 Pearson Education, Inc.
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Depreciation
Depreciable Value & Depreciable Life Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation. No adjustment is required for expected salvage value. For tax purposes, the depreciable life of an asset is determined by its MACRS recovery predetermined period. MACRS property classes and rates are shown in Table 3.1 and Table 3.2 on the following slides.
Copyright 2003 Pearson Education, Inc.
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Depreciation
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Depreciation
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Depreciation
An Example
Baker Corporation acquired, for an installed cost of $40,000, a machine having a recovery period of 5 years. Using the applicable MACRS rates, the depreciation expense each year is as follows:
Year 1 2 3 4 5 6 Totals
Copyright 2003 Pearson Education, Inc.
MACRS Rates Depreciation 20% 32% 19% 12% 12% 5% 100% $ $ $ $ $ $ $ 8,000 12,800 7,600 4,800 4,800 2,000 40,000
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Depreciation
Question? If as a business owner you could design a design a depreciation schedule to look the way you wanted it to, what would it look like? Exactly! As long as you have positive taxable income, you would always prefer to expense it (100% depreciation). Remember, a dollar saved today is worth more than a dollar saved tomorrow!
Copyright 2003 Pearson Education, Inc.
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The excess cash of $22,000 in October should be invested in marketable securities. The deficits in November and December need to be financed.
Copyright 2003 Pearson Education, Inc.
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This forecast is based on an increase from $20 to $25 per unit for Model X and $40 to $50 per unit for Model Y. These increases are required to cover anticipated increases in various costs, including labor, materials, & overhead .
Copyright 2003 Pearson Education, Inc.
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$ 100,000 80,000 $ $ 20,000 10,000 10,000 1,000 $ $ 9,000 1,350 7,650 4,000 $ 3,650
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