ACCOUNTING CONCEPTS. BASIC CASH FLOW MODEL REVENUES = PRICE * VOLUME = R SALVAGE = VALUE OF CAPITAL AT THE END OF THE PROJECT LIFE = S PROFIT =

ACCOUNTING CONCEPTS

BASIC CASH FLOW MODEL

REVENUES = PRICE * VOLUME = R SALVAGE = VALUE OF CAPITAL AT

THE END OF THE PROJECT LIFE = S PROFIT = REVENUES - COM, R - COM COM = COSTS OF MANUFACTURE

CASH FLOW CALCULATION CASH BEFORE TAXES = R - COM = Cb PROFIT BEFORE TAXES = Cb - D = Pb PROFIT AFTER TAXES = Pb*(1 - TAX) =

Pa CASH AFTER TAXES = Pa + D – CAP SPREADSHEET CONFIGURATION

DISCUSSION OF CATEGORIES

YEAR YEAR IS NORMALLY STARTED WITH A

VALUE OF 1 THE VALUES BASED ON THE AMOUNTS

IN THE FIRST YEAR WHEN AMOUNTS ARE COMPOUNDED OR DISCOUNTED

WHEN TIME VALUE OF MONEY IS CONSIDERED THE FIRST YEAR VALUES WILL INCREASE OR DECREASE FROM THE CONSTANT DOLLAR VALUES


CAPITAL, CAP INVESTED CAPITAL IS A POSITIVE VALUE

THAT IS CONSIDERED A NEGATIVE CASH FLOW – MONEY SPENT

CAPITAL SOLD AS WORKING CAPITAL OR SALVAGE HAS A NEGATIVE VALUE AND IS CONSIDERED A POSITIVE CASH FLOW – MONEY EARNED


FIXED CAPITAL (DEPRECIABLE) WORKING CAPITAL (NOT

DEPRECIABLE) INVENTORIES OF RAW MATERIALS AND

FINISHED GOODS GOODS IN PROCESS (ESTIMATED

VALUES) SALVAGE (SUBTRACTED FROM

DEPRECIABLE TOTAL)


FIXED CAPITAL THE EQUITY PORTION IS NORMALLY INVESTED

OVER THE INITIAL YEARS OF THE PROJECT IF A PROJECT INCLUDES DEBT/EQUITY

FINANCING THE CAPITAL INVESTED STARTS WITH THE

EQUITY INVESTMENT THE EQUITY VALUE INCREASES WITH EACH

PAYMENT TOWARDS THE NOTE EQUITY COMPONENTS ARE POST-TAX

PROFITS


FIXED CAPITAL THE ORIGINAL TOTAL PROJECT FIXED

CAPITAL VALUE IS USED FOR CALCULATING DEPRECIATION, RATHER THAN THE EQUITY

ADDITIONAL FIXED CAPITAL INVESTMENTS• MAY BE MADE AT LATER PERIODS, DUE TO

EXPANSIONS OR PROCESS MODIFICATIONS• DEPRECIATION STARTS AT THE TIME OF THE

ADDITIONAL INVESTMENT


WORKING CAPITAL NORMALLY INVESTED AT THE START

OF OPERATIONS CAN BE ADJUSTED EVERY YEAR,

USING TAXED PROFITS IS SOLD OFF AT THE END OF THE

PROJECT IS NOT DEPRECIABLE


REVENUES, R POSITIVE VALUES THAT ARE CONSIDERED AS

POSITIVE CASH FLOWS BASED ON PRICE OF PRODUCT AND VOLUME CAN BE ADJUSTED TO REFLECT INITIAL START-UP

PERIOD WHEN IT MAY BE BELOW DESIGN LEVELS CAN BE ADJUSTED ANNUALLY IN TERMS OF

PRICE AND VOLUME TO PROVIDE A REALISTIC PATTERN

INCLUDES ANY BYPRODUCTS SOLD OUTSIDE THE PROCESS

NORMALLY DOES NOT INCLUDE CREDITS FOR UTILITIES GENERATED BY THE PROCESS – THESE ARE IN THE COST OF MANUFACTURE CATEGORY


COST OF MANUFACTURE, COM POSITVE VALUES CONSIDERED AS

NEGATIVE CASH FLOWS VARIABLE COSTS

RAW MATERIALS ENERGY UTILITY CREDITS OTHER PRODUCTION BASED

CONSUMABLES


FIXED COSTS INCLUDE INSURANCE PROPERTY TAXES (NOT INCOME

TAXES) CORPORATE AND PLANT OVERHEAD

http://www.learnenglish.org.uk/images/taxman.gif


FIXED COSTS INCLUDE DEBT/EQUITY FINANCING COSTS FOR

LOANS THE INTEREST PORTION IS AN EXPENSE THE PRINCIPLE PORTION

IS NOT CONSIDERED AS AN EXPENSE, SO REMAINS IN THE BEFORE-TAX PROFIT CATEGORY

THE TAXED VALUE IS INCLUDED IN THE PROFIT AFTER TAXES, Pb

THE TOTAL PAYMENT TO PRINCIPLE • TRANSFERRED TO THE CAPITAL COLUMN AS A NON-

TAXED TOTAL • IS DEDUCTED FROM CASH FLOW AFTER TAXES AS A

CAPITAL EXPENSE


REGULATED COSTS HAVE A FIXED AND VARIABLE

CHARACTER LABOR LABORATORY PLANT AND CORPORATE OVERHEAD

SUCH AS CORPORATE RESEARCH


DEPRECIATION, DEPR CONSIDERED AS A POSITIVE PRE-TAX

EXPENDITURE THE VALUE IS CONSIDERED A POSITIVE CASH

FLOW AND IS ADDED TO THE AFTER-TAX PROFIT THE DEPRECIATION SCHEDULE IS DEVELOPED

BASED ON THE TOTAL FIXED INVESTMENT THE DATE OF INITIAL OPERATION FOR PROFIT THE DEPRECIATION METHOD USED FOR THE PROJECT

(SOYD FOR OUR PROJECT) DEPRECIATION IS NOT ADJUSTED FOR

INFLATION, BUT IT IS ADJUSTED FOR DISCOUNTED CASH FLOW CALCULATIONS


PROFIT BEFORE TAXES, Pb

CONSISTS OF REVENUES LESS C.O.M. AND LESS DEPRECIATION

FOR FINANCING THE INTEREST PORTION IS

CONSIDERED IN THE C.O.M. BUT THE PRINCIPAL PORTION

REMAINS WITH THE REVENUES


TAXES INCOME TAXES, NOT PROPERTY

TAXES BASED ON FEDERAL AND STATE TAX

RATES (TOTAL FOR OUR PROJECT ASSUMED TO BE 35%)

NORMALLY CONSIDERED TO BE A CONSTANT RATE OVER THE LIFE OF THE PROJECT


TAXES WITH A LOSS A BEFORE-TAX PROFIT LOSS, WHICH RESULTS

IN CALCULATION OF A NEGATIVE TAX VALUE MUST BE CARRIED FORWARD TO A LATER YEAR (TAX

LOSS CARRY FORWARD) THERE IS NO REFUND OF NEGATIVE TAXES THE TAX FOR THE LOSS YEAR IS ZERO THE PROFIT LOSSES ARE APPLIED TO FUTURE PROFIT

GAINS TO DETERMINE THE Pb IN THE LATER YEAR THIS METHOD OF TAX LOSS ADJUSTMENT IS

SOMETIMES USED BY COMPANIES WHO AQUIRE OTHER FIRMS FOR THE PURPOSE OF PICKING UP THEIR ACCUMULATED TAX LOSS


CASH FLOW AFTER TAXES, Ca CASH AFTER IS THE SUM OF THE PROFIT

AFTER PLUS DEPRECIATION, MINUS ANY CAPITAL CHARGES

FOR A PROJECT WITH DEBT/EQUITY FUNDING, THE PORTION OF THE NOTE PAID TO PRINCIPLE IS CONSIDERED AS A CAPITAL EXPENDITURE, SO A NEGATIVE CASH FLOW

THE CASH FLOW AFTER TAX AMOUNTS ARE THOSE THAT ARE DISCOUNTED FOR CALCULATION OF DISCOUNTED CASH FLOW RATE OF RETURN (DCRR)


DCRR (DISCOUNTED CASH FLOWRATE OF RETURN)

MOST SPREADSHEETS HAVE A FUNCTION CALLED EITHER DISCOUNTED CASH FLOW OR INTERNAL RATE OF RETURN THAT CAN BE APPLIED TO A SPECIFIC COLUMN

FOR OUR PROJECTS, THE PRICE OF THE PRODUCT IS NORMALLY ADJUSTED TO OBTAIN THE TARGETED DCRR


CUMULATIVE CASH FLOWS, CUM Ca CUMULATIVE CASH FLOWS ARE THE SUM

OF THE ANNUAL CASH FLOWS, Ca TYPICALLY NEGATIVE DURING THE

INITIAL PHASES OF A PROJECT, DUE TO CAPITAL EXPENDITURES

THE YEAR IN WHICH THE CUM Ca VALUE REACHES ZERO (WITHOUT

DISCOUNTING) DETERMINES THE BREAKEVEN VALUE

FOR A DCRR CALCULATION, THE CUM Ca VALUE AT THE END OF THE PROJECT IS

ZERO, BY DEFINITION

ACCOUNTING CONCEPTS. BASIC CASH FLOW MODEL REVENUES = PRICE * VOLUME = R SALVAGE = VALUE OF CAPITAL AT THE END OF THE PROJECT LIFE = S PROFIT =

Documents

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year values

depreciable slide

equity value increases

values goods

equity investment

values salvage

time value of money