1.

Describe the overall cash flow through the firm in terms of operating flows, investments
flows, and financing flows.
- Operating flows relate to the firm's production cycle⎯from the purchase of raw materials
to the finished product. Any expenses incurred directly related to this process are
considered operating flows.
Investment flows result from the purchases and sales of fixed assets and business
interests. Financing flows result from borrowing and repayment of debt obligations and
from equity
transactions such as the sale or purchase of stock and dividend payments.
2. Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash
is classified as a cash outflow (use) in preparing the statement of cash flows
- your cash balance is represented by the amount of cash in the jar. take it from the jar which it
decreases cash balance and provides and inflow to your pocket. Conversely when you have
excess cash you deposit it into the jar which increases your cash balance and provides a cash
outflow from your pocket.
3. Why is depreciation (as well as amortization and depletion) considered a noncash charge?
- Depreciation (and amortization and depletion) is a cash inflow to the firm since it is treated as a
non-cash expenditure from the income statement. This reduces the firm's cash outflows for tax
purposes. Cash flow from operations can be found by adding depreciation and other non-cash
charges back to profits after taxes. Since depreciation is deducted for tax purposes but does not
actually require any cash outlay, it must be added back in order to get a true picture of operating
cash flows.
4. Describe the general format of the statement of cash flows. How are cash inflows differentiated
from cash outflows on this statement?
-
The cash flow statement follows an activity format and is divided into three sections: operating,
investing and financing activities. Generally, the operating activities are reported first,
followed by the investing and finally, the financing activities.
Cash Inflow describes all of the income that is brought to your business through its
activities-- any strategy to bring profits into the business. Cash Outflow includes any debts,
liabilities, and operating costs-- any amount of funds leaving your business.
5. Why do we exclude interest expense and taxes from operating cash flow
- We exclude interest and taxes from operating cash flow because a firm's operating cash
flow represents the cash generated from the normal operations of business like,
producing and manufacturing and selling and distribution of its goods and services.
6. What is the financial planning process? Contrast long-term (strategic) financial plans and short-
term (operating) financial plans.
- The financial planning process is the development of long-term strategic financial plans that
guide the preparation of short-term operating plans and budgets. Long-term (strategic) financial
plans anticipate the financial impact of planned long-term actions (periods ranging from two to
ten years). Short-term (operating) financial plans anticipate the financial impact of short-term
actions (periods generally less than two years).
7. Which three statements result as part of the short-term (operating) financial planning process?

- Key outputs resulting from the short-term financial planning process are operating budgets, the cash
budget, and the pro forma financial statements

8. What is the purpose of the cash budget? What role does the sales forecast play in its preparation?
- The purpose of the cash budget is for use by firm's to estimate its short-term cash
requirements, with particular attention being paid to planning for surplus cash and for cash
shortages. The role that sales forecast play in preparation of the cash budget is it is the key
input to the short-term financial planning process. Also, the cash budget begins with a sales
forecast, which is simply a prediction of the sales activity during a given period
9. Briefly describe the basic format of the cash budget.

- Cash budget is a component of master budget and it is based on the following components of master
budget:

Schedule of expected cash collections

Schedule of expected cash payments
Selling and administrative expense budget

10. What is the difference between future value and present value? Which approach is generally
preferred by financial managers?
-
Present value is the sum of money that must be invested in order to achieve a specific future
goal. Future value is the dollar amount that will accrue over time when that sum is invested. The
present value is the amount you must invest in order to realize the future value.
The approach that is preferred is the present value technique because financial managers
make decisions at time zero.
11. define and differentiate among the three basic patterns of cash flow:

- (1) a single amount, (2) an annuity, and (3) a mixed stream.

A single amount cash flow refers to an individual, stand alone, value occurring at one
point in time. An annuity consists of an unbroken series of cash flows of equal dollar
amount occurring over more than one period. It is basically a stream of equal annual
cash flows, either inflows or outflows. There are two basic types of annuities:

12. How is the compounding process related to the payment of interest on savings? What is the
general equation for future value?

- It is the amount of interest EARNED on a given deposit so it becomes part of the principal, which is the
amount of money on which the interest is PAID. FV = PV x (1 + r)^n
13. what effect would a decrease in the interest rate have on the future value of a deposit?

- A decrease in the interest rate would result in a decrease of the future value.

14. What it meant by “the present value of a future amount?” what is the general equation for
present value?

- What is the amount that needs to be paid today to accumulate the specified FV. PV = FV / (1 + r)^n

15. what is the difference between an ordinary annuity and an annuity due? Which is more
valuable? Why?

- Cash flows of an ordinary occur at the end of the period and cash flows of an annuity due occur at the
start of the period. The annuity due is more valuable because it essentially earns an extra year's worth
of interest.

16. what are the most efficient ways to calculate present value of an annuity?

- By calculator: enter the PMT, N, and I to CPT for PV.

17. How can the formula for the future value of an annuity be modified to find the future value of an
annuity due?

- It is the exact same except for an added part: (1+r) for the one year added interest. So the formula is:

FVn = CF x [(1+r)^n - 1] / r x (1+r)

18. How can the formula for the present value of an ordinary annuity be modified to find the
present value of an annuity due?
- This difference in payment timing affects the value of the annuity. The formula for an annuity
due is as follows: Present Value of Annuity Due = PMT + PMT x ((1 - (1 + r) ^ -(n-1) / r)
If dividing an annuity due by (1+r) equals the present value of an ordinary annuity, then
multiplying the present value of an ordinary annuity by (1+r) will result in the alternative formula
shown for the present value of an annuity due.