ńňđ. 1
(âńĺăî 2)



Chapter Across the Disciplines

Why This Chapter Matters To You
Accounting: You need to understand how
depreciation is used for both tax and
financial reporting purposes; how to
develop the statement of cash flows; the
primacy of cash flows, rather than accru-

Cash Flow and als, in financial decision making; and how
pro forma financial statements are used
within the firm.

Financial Information systems: You need to under-
stand the data that must be kept to record
depreciation for tax and financial report-

Planning ing; the information needs for strategic
and operating plans; and what data are
needed as inputs for cash-planning and
profit-planning modules.
Management: You need to understand
the difference between strategic and
operating plans, and the role of each; the
importance of focusing on the firm’s cash
LEARNING GOALS flows; and how use of pro forma state-
ments can head off trouble for the firm.
Understand the effect of depreciation
LG1 Marketing: You need to understand the
on the firm’s cash flows, the depreci-
central role that marketing plays in formu-
able value of an asset, its depreciable
lating the firm’s long-term, strategic plans,
life, and tax depreciation methods.
and the importance of the sales forecast
Discuss the firm’s statement of cash as the key input for both cash planning
flows, operating cash flow, and free
and profit planning.
cash flow.
Operations: You need to understand how
Understand the financial planning
LG3 depreciation affects the value of the firm’s
process, including long-term (stra-
plant assets; how the results of operations
tegic) financial plans and short-term
are captured in the statement of cash
(operating) financial plans.
flows; that operations are monitored pri-
Discuss the cash-planning process marily in the firm’s short-term financial
and the preparation, evaluation, and plans; and the distinction between fixed
use of the cash budget.
and variable operating costs.
Explain the simplified procedures
used to prepare and evaluate the pro
forma income statement and the pro
forma balance sheet.
Cite the weaknesses of the simplified
approaches to pro forma financial
statement preparation and the com-
mon uses of pro forma statements.
CHAPTER 3 Cash Flow and Financial Planning

C ash flow is the primary focus of financial management. The goal is twofold:
to meet the firm’s financial obligations and to generate positive cash flow for
its owners. Financial planning focuses on the firm’s cash and profits—both of
which are key elements of continued financial success, and even survival. This
chapter outlines how the firm analyzes its cash flows, including the effect of
depreciation, and the use of cash budgets and pro forma statements as tools of
financial planning.

Analyzing the Firm’s Cash Flow

Cash flow, the lifeblood of the firm, is the primary focus of the financial manager
both in managing day-to-day finances and in planning and making strategic deci-
sions aimed at creation of shareholder value. An important factor affecting a
firm’s cash flow is depreciation (and any other noncash charges). From an
accounting perspective, a firm’s cash flows can be summarized in the statement of
cash flows, which was described in Chapter 2. From a strict financial perspective,
firms often focus on both operating cash flow, which is used in managerial deci-
sion making, and free cash flow, which is closely watched by participants in the
capital market. We begin our analysis of cash flow by considering the key aspects
of depreciation, which is closely related to the firm’s cash flow.

Business firms are permitted for tax and financial reporting purposes to charge a
portion of the costs of fixed assets systematically against annual revenues. This
allocation of historical cost over time is called depreciation. For tax purposes, the
The systematic charging of a depreciation of business assets is regulated by the Internal Revenue Code. Because
portion of the costs of fixed
the objectives of financial reporting are sometimes different from those of tax leg-
assets against annual revenues
islation, firms often use different depreciation methods for financial reporting
over time.
than those required for tax purposes. Tax laws are used to accomplish economic
goals such as providing incentives for business investment in certain types of
assets, whereas the objectives of financial reporting are of course quite different.
Keeping two different sets of records for these two different purposes is legal.
Depreciation for tax purposes is determined by using the modified accelerated
modified accelerated cost
recovery system (MACRS) cost recovery system (MACRS); a variety of depreciation methods are available for
System used to determine the financial reporting purposes. Before we discuss the methods of depreciating an
depreciation of assets for tax
asset, you must understand the depreciable value of an asset and the depreciable
life of an asset.

Depreciable Value of an Asset
Under the basic MACRS procedures, the depreciable value of an asset (the amount
to be depreciated) is its full cost, including outlays for installation.1 No adjustment
is required for expected salvage value.

1. Land values are not depreciable. Therefore, to determine the depreciable value of real estate, the value of the land
is subtracted from the cost of real estate. In other words, only buildings and other improvements are depreciable.
88 PART 1 Introduction to Managerial Finance

Baker Corporation acquired a new machine at a cost of $38,000, with installation
costs of $2,000. Regardless of its expected salvage value, the depreciable value of
the machine is $40,000: $38,000 cost $2,000 installation cost.

Depreciable Life of an Asset
The time period over which an asset is depreciated—its depreciable life—can sig-
depreciable life
Time period over which an asset nificantly affect the pattern of cash flows. The shorter the depreciable life, the
is depreciated.
more quickly the cash flow created by the depreciation write-off will be received.
Given the financial manager’s preference for faster receipt of cash flows, a shorter
depreciable life is preferred to a longer one. However, the firm must abide by cer-
tain Internal Revenue Service (IRS) requirements for determining depreciable life.
These MACRS standards, which apply to both new and used assets, require the
taxpayer to use as an asset’s depreciable life the appropriate MACRS recovery
recovery period
period.2 There are six MACRS recovery periods—3, 5, 7, 10, 15, and 20 years—
The appropriate depreciable life
of a particular asset as excluding real estate. It is customary to refer to the property classes, in accordance
determined by MACRS.
with their recovery periods, as 3-, 5-, 7-, 10-, 15-, and 20-year property. The first
four property classes—those routinely used by business—are defined in Table 3.1.

Depreciation Methods
For financial reporting purposes, a variety of depreciation methods (straight-line,
double-declining balance, and sum-of-the-years’-digits3) can be used. For tax pur-
poses, using MACRS recovery periods, assets in the first four property classes are
depreciated by the double-declining balance (200 percent) method, using the half-
year convention and switching to straight-line when advantageous. Although
tables of depreciation percentages are not provided by law, the approximate per-
centages (rounded to the nearest whole percent) written off each year for the first
four property classes are shown in Table 3.2. Rather than using the percentages
in the table, the firm can either use straight-line depreciation over the asset’s
recovery period with the half-year convention or use the alternative depreciation
system. For purposes of this text, we will use the MACRS depreciation percent-
ages, because they generally provide for the fastest write-off and therefore the
best cash flow effects for the profitable firm.

TABLE 3.1 First Four Property Classes Under MACRS

Property class
(recovery period) Definition

3 years Research equipment and certain special tools.
5 years Computers, typewriters, copiers, duplicating equipment, cars, light-
duty trucks, qualified technological equipment, and similar assets.
7 years Office furniture, fixtures, most manufacturing equipment, railroad
track, and single-purpose agricultural and horticultural structures.
10 years Equipment used in petroleum refining or in the manufacture of
tobacco products and certain food products.

2. An exception occurs in the case of assets depreciated under the alternative depreciation system. For convenience,
in this text we ignore the depreciation of assets under this system.
3. For a review of these depreciation methods as well as other aspects of financial reporting, see any recently pub-
lished financial accounting text.
CHAPTER 3 Cash Flow and Financial Planning

TABLE 3.2 Rounded Depreciation Percentages
by Recovery Year Using MACRS for
First Four Property Classes

Percentage by recovery yeara

Recovery year 3 years 5 years 7 years 10 years

1 33% 20% 14% 10%
2 45 32 25 18
3 15 19 18 14
4 7 12 12 12
5 12 9 9
6 5 9 8
7 9 7
8 4 6
9 6
10 6
11 4
Totals 100% 100% 100% 100%
aThese percentages have been rounded to the nearest whole percent to simplify
calculations while retaining realism. To calculate the actual depreciation for tax
purposes, be sure to apply the actual unrounded percentages or directly apply
double-declining balance (200%) depreciation using the half-year convention.

Because MACRS requires use of the half-year convention, assets are assumed
to be acquired in the middle of the year, and therefore only one-half of the first
year’s depreciation is recovered in the first year. As a result, the final half-year of
depreciation is recovered in the year immediately following the asset’s stated
recovery period. In Table 3.2, the depreciation percentages for an n-year class
asset are given for n 1 years. For example, a 5-year asset is depreciated over 6
recovery years. The application of the tax depreciation percentages given in Table
3.2 can be demonstrated by a simple example.

Baker Corporation acquired, for an installed cost of $40,000, a machine having a
recovery period of 5 years. Using the applicable percentages from Table 3.2,
Baker calculates the depreciation in each year as follows:

Percentages Depreciation
Cost (from Table 3.2) [(1) (2)]
Year (1) (2) (3)

1 $40,000 20% $ 8,000
2 40,000 32 12,800
3 40,000 19 7,600
4 40,000 12 4,800
5 40,000 12 4,800
6 40,000 5 2,000
Totals 100% $40,000

Column 3 shows that the full cost of the asset is written off over 6 recovery years.
90 PART 1 Introduction to Managerial Finance

Because financial managers focus primarily on cash flows, only tax deprecia-
tion methods will be utilized throughout this textbook.

Developing the Statement of Cash Flows
The statement of cash flows, introduced in Chapter 2, summarizes the firm’s cash
flow over a given period of time. Before discussing the statement and its interpre-
tation, we will review the cash flow through the firm and the classification of
inflows and outflows of cash.

The Firm’s Cash Flows
Figure 3.1 illustrates the firm’s cash flows. Note that marketable securities are
considered the same as cash because of their highly liquid nature. Both cash and
operating flows
marketable securities represent a reservoir of liquidity that is increased by cash
Cash flows directly related to
inflows and decreased by cash outflows. Also note that the firm’s cash flows can
sale and production of the firm’s
be divided into (1) operating flows, (2) investment flows, and (3) financing flows.
products and services.
The operating flows are cash inflows and outflows directly related to sale and
investment flows
production of the firm’s products and services. Investment flows are cash flows
Cash flows associated with
associated with purchase and sale of both fixed assets and business interests.
purchase and sale of both fixed
assets and business interests. Clearly, purchase transactions would result in cash outflows, whereas sales trans-
actions would generate cash inflows. The financing flows result from debt and
financing flows
equity financing transactions. Incurring (or repaying) either short-term or long-
Cash flows that result from debt
and equity financing transac- term debt would result in a corresponding cash inflow (or outflow). Similarly, the
tions; includes incurrence and sale of stock would result in a cash inflow; the payment of cash dividends or
repayment of debt, cash inflow
repurchase of stock would result in a financing outflow. In combination, the
from the sale of stock, and cash
firm’s operating, investment, and financing cash flows during a given period
outflows to pay cash dividends or
affect the firm’s cash and marketable securities balances.
repurchase stock.

Classifying Inflows and Outflows of Cash
The statement of cash flows in effect summarizes the inflows and outflows of
cash during a given period. Table 3.3 (on page 92) classifies the basic inflows
(sources) and outflows (uses) of cash. For example, if a firm’s accounts payable
increased by $1,000 during the year, the change would be an inflow of cash. If the
firm’s inventory increased by $2,500, the change would be an outflow of cash.
A few additional points can be made with respect to the classification scheme
in Table 3.3:
1. A decrease in an asset, such as the firm’s cash balance, is an inflow of cash,
because cash that has been tied up in the asset is released and can be used for
some other purpose, such as repaying a loan. On the other hand, an increase
in the firm’s cash balance is an outflow of cash, because additional cash is
being tied up in the firm’s cash balance.
2. Depreciation (like amortization and depletion) is a noncash charge—an ex-
noncash charge
An expense deducted on the pense that is deducted on the income statement but does not involve the
income statement but does not
actual outlay of cash during the period. Because it shields the firm from taxes
involve the actual outlay of cash
by lowering taxable income, the noncash charge is considered a cash inflow.
during the period; includes
From a strict accounting perspective, adding depreciation back to the firm’s
depreciation, amortization, and
net profits after taxes gives cash flow from operations:

Cash flow from operations
Net profits after taxes Depreciation and other noncash charges (3.1)
CHAPTER 3 Cash Flow and Financial Planning

FIGURE 3.1 Cash Flows
The firm’s cash flows
(1) Operating Flows (2) Investment Flows

Payment of Accruals
of Credit Purchase
Raw Accounts
Fixed Assets
Materials Payable


Work in Overhead Business
Process Expenses Interests

Finished Purchase

Operating (incl.
Depreciation) and
Interest Expense (3) Financing Flows
Payment Debt
(Short-Term and

Sale of Stock
Cash Sales
Repurchase of Stock
Payment of Cash Dividends

Collection of Credit Sales

Note that a firm can have a net loss (negative net profits after taxes) and still
have positive cash flow from operations when depreciation (and other non-
cash charges) during the period are greater than the net loss. In the statement
of cash flows, net profits after taxes (or net losses) and depreciation (and
other noncash charges) are therefore treated as separate entries.
3. Because depreciation is treated as a separate cash inflow, only gross rather
than net changes in fixed assets appear on the statement of cash flows. This
treatment avoids the potential double counting of depreciation.
4. Direct entries of changes in retained earnings are not included on the state-
ment of cash flows. Instead, entries for items that affect retained earnings
appear as net profits or losses after taxes and dividends paid.
92 PART 1 Introduction to Managerial Finance

TABLE 3.3 The Inflows and Outflows of Cash

Inflows (sources) Outflows (uses)

Decrease in any asset Increase in any asset
Increase in any liability Decrease in any liability
Net profits after taxes Net loss
Depreciation and other noncash charges Dividends paid
Sale of stock Repurchase or retirement of stock

Preparing the Statement of Cash Flows
The statement of cash flows for a given period is developed using the income
statement for the period, along with the beginning- and end-of-period balance
sheets. The income statement for the year ended December 31, 2003, and the
December 31 balance sheets for 2002 and 2003 for Baker Corporation are given
in Tables 3.4 and 3.5, respectively. The statement of cash flows for the year

TABLE 3.4 Baker Corporation Income
Statement ($000) for the
Year Ended December 31,
Sales revenue $1,700
Less: Cost of goods sold 1,000
Gross profits $ 700
Less: Operating expenses
Selling expense $ 70
General and administrative expense 120
Lease expensea 40
Depreciation expense 100
Total operating expense 330
Earnings before interest and taxes (EBIT) $ 370
Less: Interest expense 70
Net profits before taxes $ 300
Less: Taxes (rate 40%) 120
Net profits after taxes $ 180
Less: Preferred stock dividends 10
Earnings available for common stockholders $ 170

Earnings per share (EPS)b $1.70
aLease expense is shown here as a separate item rather than
included as interest expense as specified by the FASB for finan-
cial-reporting purposes. The approach used here is consistent
with tax-reporting rather than financial-reporting procedures.
bCalculated by dividing the earnings available for common stock-
holders by the number of shares of common stock outstanding
($170,000 100,000 shares $1.70 per share).
CHAPTER 3 Cash Flow and Financial Planning

TABLE 3.5 Baker Corporation Balance
Sheets ($000)

December 31

Assets 2003 2002

Current assets
Cash $ 400 $ 300
Marketable securities 600 200
Accounts receivable 400 500
Inventories 600 900
Total current assets $2,000 $1,900
Gross fixed assets (at cost)
Land and buildings $1,200 $1,050
Machinery and equipment 850 800
Furniture and fixtures 300 220
Vehicles 100 80
Other (includes certain leases) 50 50
Total gross fixed assets (at cost) $2,500 $2,200
Less: Accumulated depreciation 1,300 1,200
Net fixed assets $1,200 $1,000
Total assets $3,200 $2,900

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable $ 700 $ 500
Notes payable 600 700
Accruals 100 200
Total current liabilities $1,400 $1,400
Long-term debt $ 600 $ 400
Total liabilities $2,000 $1,800
Stockholders’ equity
Preferred stock $ 100 $ 100
Common stock—$1.20 par, 100,000 shares
outstanding in 2003 and 2002 120 120
Paid-in capital in excess of par on common stock 380 380
Retained earnings 600 500
Total stockholders’ equity $1,200 $1,100
Total liabilities and stockholders’ equity $3,200 $2,900

ended December 31, 2003, for Baker Corporation is presented in Table 3.6.
Note that all cash inflows as well as net profits after taxes and depreciation are
treated as positive values. All cash outflows, any losses, and dividends paid are
treated as negative values. The items in each category—operating, investment,
and financing—are totaled, and the three totals are added to get the “Net
94 PART 1 Introduction to Managerial Finance

TABLE 3.6 Baker Corporation Statement of
Cash Flows ($000) for the Year
Ended December 31, 2003
Cash Flow from Operating Activities
Net profits after taxes $180
Depreciation 100
Decrease in accounts receivable 100
Decrease in inventories 300
Increase in accounts payable 200
( 100)a
Decrease in accruals
Cash provided by operating activities $780
Cash Flow from Investment Activities
Increase in gross fixed assets ($300)
Changes in business interests 0
Cash provided by investment activities ( 300)
Cash Flow from Financing Activities
Decrease in notes payable ($100)
Increase in long-term debts 200
Changes in stockholders’ equityb 0
Dividends paid ( 80)
Cash provided by financing activities 20
Net increase in cash and marketable securities $500

aAs is customary, parentheses are used to denote a negative number, which in this
case is a cash outflow.
bRetained earnings are excluded here, because their change is actually reflected in
the combination of the “Net profits after taxes” and “Dividends paid” entries.

increase (decrease) in cash and marketable securities” for the period. As a
check, this value should reconcile with the actual change in cash and mar-
ketable securities for the year, which is obtained from the beginning- and end-
of-period balance sheets.

Interpreting the Statement
The statement of cash flows allows the financial manager and other interested
parties to analyze the firm’s cash flow. The manager should pay special attention
both to the major categories of cash flow and to the individual items of cash
inflow and outflow, to assess whether any developments have occurred that are
contrary to the company’s financial policies. In addition, the statement can be
used to evaluate progress toward projected goals or to isolate inefficiencies. For
example, increases in accounts receivable or inventories resulting in major cash
outflows may signal credit or inventory problems, respectively. The financial
manager also can prepare a statement of cash flows developed from projected
financial statements. This approach can be used to determine whether planned
actions are desirable in view of the resulting cash flows.
An understanding of the basic financial principles presented throughout
this text is absolutely essential to the effective interpretation of the statement of
cash flows.
CHAPTER 3 Cash Flow and Financial Planning

Operating Cash Flow
A firm’s operating cash flow (OCF) is the cash flow it generates from its normal
operating cash flow (OCF)
The cash flow a firm generates operations—producing and selling its output of goods or services. A variety of
from its normal operations; definitions of OCF can be found in the financial literature. We’ve already been
calculated as EBIT taxes
introduced to the simple accounting definition of cash flow from operations in
Equation 3.1. Here we refine this definition to estimate cash flows more accu-
rately. Unlike the earlier definition, we exclude interest and taxes in order to
focus on the true cash flow resulting from operations without regard to financing
costs and taxes. Operating cash flow (OCF) is defined in Equation 3.2.
OCF EBIT Taxes Depreciation (3.2)

Substituting the values for Baker Corporation from its income statement (Table
3.4) into Equation 3.2, we get
OCF $370 $120 $100 $350
Baker Corporation during 2003 generated $350,000 of cash flow from pro-
ducing and selling its output. Because Baker’s operating cash flow is positive, we
can conclude that the firm’s operations are generating positive cash flows.

Comparing Equations 3.1 and 3.2, we can see that the key difference
between the accounting and finance definitions of operating cash flow is that the
finance definition excludes interest as an operating flow, whereas the accounting
definition in effect includes it as an operating flow. In the unlikely case that a firm
had no interest expense, the accounting (Equation 3.1) and finance (Equation
3.2) definitions of operating cash flow would be the same.

Free Cash Flow
The firm’s free cash flow (FCF) represents the amount of cash flow available to
free cash flow (FCF)
The amount of cash flow investors—the providers of debt (creditors) and equity (owners)—after the firm
available to investors (creditors has met all operating needs and paid for investments in net fixed assets and net
and owners) after the firm has
current assets. It is called “free” not because it is “without cost” but because it is
met all operating needs and paid
“available” to investors. It represents the summation of the net amount of cash
for investments in net fixed
flow available to creditors and owners during the period. Free cash flow can be
assets and net current assets.
defined by Equation 3.3.
FCF OCF Net fixed asset investment (NFAI)
Net current asset investment (NCAI) (3.3)
The net fixed asset investment (NFAI) can be calculated as shown in Equa-
tion 3.4.
NFAI Change in net fixed assets Depreciation (3.4)

Using the Baker Corporation’s balance sheets in Table 3.5, we see that its change
in net fixed assets between 2002 and 2003 was $200 ($1,200 in 2003 $1,000
in 2002). Substituting this value and the $100 of depreciation for 2003 into
Equation 3.4, we get Baker’s net fixed asset investment (NFAI) for 2003:
NFAI $200 $100 $300
Baker Corporation therefore invested a net $300,000 in fixed assets during 2003.
This amount would, of course, represent a net cash outflow to acquire fixed
assets during 2003.
96 PART 1 Introduction to Managerial Finance

Looking at Equation 3.4, we can see that if the depreciation during a year is less
than the decrease during that year in net fixed assets, the NFAI would be nega-
tive. A negative NFAI represents a net cash inflow attributable to the fact that the
firm sold more assets than it acquired during the year.
The final variable in the FCF equation, net current asset investment (NCAI),
represents the net investment made by the firm in its current (operating) assets.
“Net” refers to the difference between current assets and spontaneous current lia-
bilities, which typically include accounts payable and accruals. (Because they are
a negotiated source of short-term financing, notes payable are not included in the
NCAI calculation. Instead, they serve as a creditor claim on the firm’s free cash
flow.) Equation 3.5 shows the NCAI calculation.

NCAI Change in current assets Change in spontaneous
current liabilities (Accounts payable Accruals) (3.5)

Looking at the Baker Corporation’s balance sheets for 2002 and 2003 in Table
3.5, we see that the change in current assets between 2002 and 2003 is $100
($2,000 in 2003 $1,900 in 2002). The difference between Baker’s accounts
payable plus accruals of $800 in 2003 ($700 in accounts payable $100 in
accruals) and of $700 in 2002 ($500 in accounts payable $200 in accruals) is
$100 ($800 in 2003 $700 in 2002). Substituting into Equation 3.5 the
change in current assets and the change in the sum of accounts payable plus
accruals for Baker Corporation, we get its 2003 NCAI:

NCAI $100 $100 $0
This means that during 2003 Baker Corporation made no investment ($0) in its
current assets net of spontaneous current liabilities.
Now we can substitute Baker Corporation’s 2003 operating cash flow (OCF)
of $350, its net fixed asset investment (NFAI) of $300, and its net current asset
investment (NCAI) of $0 into Equation 3.3 to find its free cash flow (FCF):

FCF $350 $300 $0 $50
We can see that during 2003 Baker generated $50,000 of free cash flow, which it
can use to pay its investors—creditors (payment of interest) and owners (payment
of dividends). Thus, the firm generated adequate cash flow to cover all of its oper-
ating costs and investments and had free cash flow available to pay investors.

Further analysis of free cash flow is beyond the scope of this initial introduc-
tion to cash flow. Clearly, cash flow is the lifeblood of the firm. We next consider
various aspects of financial planning for cash flow and profit.

Review Questions

3–1 Briefly describe the first four modified accelerated cost recovery system
(MACRS) property classes and recovery periods. Explain how the depreci-
ation percentages are determined by using the MACRS recovery periods.
3–2 Describe the overall cash flow through the firm in terms of operating
flows, investments flows, and financing flows.
CHAPTER 3 Cash Flow and Financial Planning

3–3 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.
3–4 Why is depreciation (as well as amortization and depletion) considered a
noncash charge? How do accountants estimate cash flow from operations?
3–5 Describe the general format of the statement of cash flows. How are cash
inflows differentiated from cash outflows on this statement?
3–6 From a strict financial perspective, define and differentiate between a
firm’s operating cash flow (OCF) and its free cash flow (FCF).

The Financial Planning Process

Financial planning is an important aspect of the firm’s operations because it pro-
vides road maps for guiding, coordinating, and controlling the firm’s actions to
achieve its objectives. Two key aspects of the financial planning process are cash
planning and profit planning. Cash planning involves preparation of the firm’s
cash budget. Profit planning involves preparation of pro forma statements. Both
the cash budget and the pro forma statements are useful for internal financial
planning; they also are routinely required by existing and prospective lenders.
The financial planning process begins with long-term, or strategic, financial
financial planning process
Planning that begins with long- plans. These in turn guide the formulation of short-term, or operating, plans and
term, or strategic, financial plans
budgets. Generally, the short-term plans and budgets implement the firm’s long-
that in turn guide the formulation
term strategic objectives. Although the remainder of this chapter places primary
of short-term, or operating, plans
emphasis on short-term financial plans and budgets, a few preliminary comments
and budgets.
on long-term financial plans are in order.

Long-Term (Strategic) Financial Plans
Long-term (strategic) financial plans lay out a company’s planned financial
long-term (strategic)
financial plans actions and the anticipated impact of those actions over periods ranging from 2
Lay out a company’s planned to 10 years. Five-year strategic plans, which are revised as significant new infor-
financial actions and the antici-
mation becomes available, are common. Generally, firms that are subject to high
pated impact of those actions
degrees of operating uncertainty, relatively short production cycles, or both, tend
over periods ranging from 2 to 10
to use shorter planning horizons.
Long-term financial plans are part of an integrated strategy that, along with
production and marketing plans, guides the firm toward strategic goals. Those
long-term plans consider proposed outlays for fixed assets, research and develop-
ment activities, marketing and product development actions, capital structure,
and major sources of financing. Also included would be termination of existing
projects, product lines, or lines of business; repayment or retirement of outstand-
ing debts; and any planned acquisitions. Such plans tend to be supported by a
series of annual budgets and profit plans.

Short-Term (Operating) Financial Plans
short-term (operating)
financial plans
Short-term (operating) financial plans specify short-term financial actions and the
Specify short-term financial
anticipated impact of those actions. These plans most often cover a 1- to 2-year
actions and the anticipated
period. Key inputs include the sales forecast and various forms of operating and
impact of those actions.
98 PART 1 Introduction to Managerial Finance

FIGURE 3.2 Short-Term Financial Planning
The short-term (operating) financial planning process

Information Needed
Output for Analysis


Pro Forma Fixed Asset
Income Outlay
Statement Plan

Pro Forma
Balance Sheet

financial data. Key outputs include a number of operating budgets, the cash bud-
get, and pro forma financial statements. The entire short-term financial planning
process is outlined in Figure 3.2.
Short-term financial planning begins with the sales forecast. From it, produc-
tion plans are developed that take into account lead (preparation) times and
include estimates of the required raw materials. Using the production plans, the
firm can estimate direct labor requirements, factory overhead outlays, and oper-
ating expenses. Once these estimates have been made, the firm’s pro forma
income statement and cash budget can be prepared. With the basic inputs (pro
forma income statement, cash budget, fixed asset outlay plan, long-term financ-
ing plan, and current-period balance sheet), the pro forma balance sheet can
finally be developed.
Throughout the remainder of this chapter, we will concentrate on the key
outputs of the short-term financial planning process: the cash budget, the pro
forma income statement, and the pro forma balance sheet.

Review Questions

3–7 What is the financial planning process? Contrast long-term (strategic)
financial plans and short-term (operating) financial plans.
CHAPTER 3 Cash Flow and Financial Planning

3–8 Which three statements result as part of the short-term (operating) finan-
cial planning process?

Cash Planning: Cash Budgets

The cash budget, or cash forecast, is a statement of the firm’s planned inflows and
cash budget (cash forecast)
A statement of the firm’s planned outflows of cash. It is used by the firm to estimate its short-term cash requirements,
inflows and outflows of cash that
with particular attention to planning for surplus cash and for cash shortages.
is used to estimate its short-term
Typically, the cash budget is designed to cover a 1-year period, divided into
cash requirements.
smaller time intervals. The number and type of intervals depend on the nature
of the business. The more seasonal and uncertain a firm’s cash flows, the
greater the number of intervals. Because many firms are confronted with a sea-
sonal cash flow pattern, the cash budget is quite often presented on a monthly
basis. Firms with stable patterns of cash flow may use quarterly or annual time

The Sales Forecast
The key input to the short-term financial planning process is the firm’s sales
sales forecast
The prediction of the firm’s sales forecast. This prediction of the firm’s sales over a given period is ordinarily pre-
over a given period, based on
pared by the marketing department. On the basis of the sales forecast, the finan-
external and/or internal data;
cial manager estimates the monthly cash flows that will result from projected
used as the key input to the
sales receipts and from outlays related to production, inventory, and sales. The
short-term financial planning
manager also determines the level of fixed assets required and the amount of
financing, if any, needed to support the forecast level of sales and production. In
practice, obtaining good data is the most difficult aspect of forecasting. The sales
forecast may be based on an analysis of external data, internal data, or a combi-
nation of the two.
An external forecast is based on the relationships observed between the
external forecast
A sales forecast based on the firm’s sales and certain key external economic indicators such as the gross
relationships observed between
domestic product (GDP), new housing starts, consumer confidence, and dispos-
the firm’s sales and certain key
able personal income. Forecasts containing these indicators are readily available.
external economic indicators.
Because the firm’s sales are often closely related to some aspect of overall
national economic activity, a forecast of economic activity should provide insight
into future sales.
Internal forecasts are based on a buildup, or consensus, of sales forecasts
internal forecast
A sales forecast based on a through the firm’s own sales channels. Typically, the firm’s salespeople in the
buildup, or consensus, of sales
field are asked to estimate how many units of each type of product they expect to
forecasts through the firm’s own
sell in the coming year. These forecasts are collected and totaled by the sales man-
sales channels.
ager, who may adjust the figures using knowledge of specific markets or of the
salesperson’s forecasting ability. Finally, adjustments may be made for additional
internal factors, such as production capabilities.
Firms generally use a combination of external and internal forecast data to
make the final sales forecast. The internal data provide insight into sales expecta-
tions, and the external data provide a means of adjusting these expectations to
100 PART 1 Introduction to Managerial Finance

In Practice
FOCUS ON PRACTICE Cash Forecasts Needed, “Rain or Shine”
Given the importance of cash to expect borrowers to monitor cash forecast of inventory and receiv-
sound financial management, it is carefully and will favor a company ables as the forecast for borrowing
surprising how many companies that prepares good cash fore- capacity required to meet its oper-
ignore the cash-forecasting proc- casts. When cash needs and the ating needs.
ess. Three reasons come up most forecasted cash position don’t Like Salant, many companies
often: Cash forecasts are always match, financial managers can are using technology to demystify
wrong, they’re hard to do, and plan for borrowed funds to close cash forecasts. Software can apply
managers don’t see the benefits of the gap. statistical techniques, graph histor-
these forecasts unless the com- New York City–based men’s ical data, or build models based on
pany is already in a cash crunch. In apparel manufacturer Salant Corp. each customer’s payment patterns.
addition, each company has its closely integrates its financial It can also tap corporate databases
own methodology for cash fore- plans and forecasts. “Our biggest for the firm’s purchases and asso-
casting. If the firm’s cash inflows challenge is to keep the cash fore- ciated payment information and
and outflows don’t form a pattern cast and the projected profit and order shipments to customers and
that managers can graph, it’s tough loss in sync with the balance sheet the associated payment terms.
to develop successful forecasts. and vice versa,” says William R. These data increase forecast
Yet the reasons to forecast Bennett, vice president and trea- accuracy.
cash are equally compelling: Cash surer. “We learned that the hard Sources: Adapted from Richard H. Gamble,
forecasts provide for reliable liq- way and developed our own “Cash Forecast: Cloudy But Clearing,” Busi-
ness Finance (May 2001), downloaded from
uidity, enable a company to mini- spreadsheet-based model.”
www.businessfinancemag.com; “Profile:
mize borrowing costs or maximize Although complicated to build, the Salant Corp.,” Yahoo! Finance, www.biz.
investment income, and help model is easy for managers to use. yahoo.com, downloaded November 19, 2001.
financial executives manage cur- Salant is a capital-intensive
rency exposures more accurately. operation, so its liquidity is linked
In times of tight credit, lenders to its assets. Bennett uses the

take into account general economic factors. The nature of the firm’s product also
often affects the mix and types of forecasting methods used.

Preparing the Cash Budget
The general format of the cash budget is presented in Table 3.7. We will discuss
each of its components individually.

Cash Receipts
Cash receipts include all of a firm’s inflows of cash in a given financial period.
cash receipts
All of a firm’s inflows of cash in a The most common components of cash receipts are cash sales, collections of
given financial period.
accounts receivable, and other cash receipts.

Coulson Industries, a defense contractor, is developing a cash budget for Octo-
ber, November, and December. Coulson’s sales in August and September were
$100,000 and $200,000, respectively. Sales of $400,000, $300,000, and
$200,000 have been forecast for October, November, and December, respec-
CHAPTER 3 Cash Flow and Financial Planning

TABLE 3.7 The General Format of the Cash Budget

Jan. Feb. ... Nov. Dec.

Cash receipts $XXX $XXG $XXM $XXT
Less: Cash disbursements XXA XXH ... XXN XXU
Net cash flow $XXB $XXI $XXO $XXV
Add: Beginning cash XXC XXD XXJ XXP XXQ
Ending cash $XXD $XXJ $XXQ $XXW
Less: Minimum cash balance XXE XXK ... XXR XXY
Required total financing $XXL $XXS
Excess cash balance $XXF $XXZ

tively. Historically, 20% of the firm’s sales have been for cash, 50% have gener-
ated accounts receivable collected after 1 month, and the remaining 30% have
generated accounts receivable collected after 2 months. Bad-debt expenses
(uncollectible accounts) have been negligible.4 In December, the firm will receive
a $30,000 dividend from stock in a subsidiary. The schedule of expected cash
receipts for the company is presented in Table 3.8. It contains the following items:

Forecast sales This initial entry is merely informational. It is provided as an
aid in calculating other sales-related items.
Cash sales The cash sales shown for each month represent 20% of the total
sales forecast for that month.
Collections of A/R These entries represent the collection of accounts receiv-
able (A/R) resulting from sales in earlier months.
Lagged 1 month These figures represent sales made in the preceding
month that generated accounts receivable collected in the current month.
Because 50% of the current month’s sales are collected 1 month later, the col-
lections of A/R with a 1-month lag shown for September represent 50% of
the sales in August, collections for October represent 50% of September
sales, and so on.
Lagged 2 months These figures represent sales made 2 months earlier
that generated accounts receivable collected in the current month. Because
30% of sales are collected 2 months later, the collections with a 2-month lag
shown for October represent 30% of the sales in August, and so on.
Other cash receipts These are cash receipts expected from sources other
than sales. Interest received, dividends received, proceeds from the sale of
equipment, stock and bond sale proceeds, and lease receipts may show up

4. Normally, it would be expected that the collection percentages would total slightly less than 100%, because some
of the accounts receivable would be uncollectible. In this example, the sum of the collection percentages is 100%
(20% 50% 30%), which reflects the fact that all sales are assumed to be collected.
102 PART 1 Introduction to Managerial Finance

TABLE 3.8 A Schedule of Projected Cash Receipts
for Coulson Industries ($000)

Aug. Sept. Oct. Nov. Dec.
Forecast sales $100 $200 $400 $300 $200

Cash sales (0.20) $20 $40 $ 80 $ 60 $ 40
Collections of A/R:
Lagged 1 month (0.50) 50 100 200 150
Lagged 2 months (0.30) 30 60 120
Other cash receipts 30
Total cash receipts $210 $320 $340

here. For Coulson Industries, the only other cash receipt is the $30,000 divi-
dend due in December.
Total cash receipts This figure represents the total of all the cash receipts
listed for each month. For Coulson Industries, we are concerned only with
October, November, and December, as shown in Table 3.8.

Cash Disbursements
Cash disbursements include all outlays of cash by the firm during a given finan-
cash disbursements
All outlays of cash by the firm cial period. The most common cash disbursements are
during a given financial period.
Cash purchases Fixed-asset outlays
Payments of accounts payable Interest payments
Rent (and lease) payments Cash dividend payments
Wages and salaries Principal payments (loans)
Tax payments Repurchases or retirements of stock

It is important to recognize that depreciation and other noncash charges are
NOT included in the cash budget, because they merely represent a scheduled
write-off of an earlier cash outflow. The impact of depreciation, as we noted ear-
lier, is reflected in the reduced cash outflow for tax payments.

Coulson Industries has gathered the following data needed for the preparation of
a cash disbursements schedule for October, November, and December.
Purchases The firm’s purchases represent 70% of sales. Of this amount,
10% is paid in cash, 70% is paid in the month immediately following the
month of purchase, and the remaining 20% is paid 2 months following the
month of purchase.5

Rent payments Rent of $5,000 will be paid each month.

5. Unlike the collection percentages for sales, the total of the payment percentages should equal 100%, because it is
expected that the firm will pay off all of its accounts payable.
CHAPTER 3 Cash Flow and Financial Planning

Wages and salaries Fixed salary cost for the year is $96,000, or $8,000 per
month. In addition, wages are estimated as 10% of monthly sales.

Tax payments Taxes of $25,000 must be paid in December.
Fixed-asset outlays New machinery costing $130,000 will be purchased
and paid for in November.
Interest payments An interest payment of $10,000 is due in December.

Cash dividend payments Cash dividends of $20,000 will be paid in October.
Principal payments (loans) A $20,000 principal payment is due in December.

Repurchases or retirements of stock No repurchase or retirement of stock is
expected between October and December.

The firm’s cash disbursements schedule, using the preceding data, is shown in
Table 3.9. Some items in the table are explained in greater detail below.
Purchases This entry is merely informational. The figures represent 70% of
the forecast sales for each month. They have been included to facilitate calcu-
lation of the cash purchases and related payments.

Cash purchases The cash purchases for each month represent 10% of the
month’s purchases.
Payments of A/P These entries represent the payment of accounts payable
(A/P) resulting from purchases in earlier months.

TABLE 3.9 A Schedule of Projected Cash
Disbursements for Coulson
Industries ($000)

Aug. Sept. Oct. Nov. Dec.
Purchases (0.70 sales) $70 $140 $280 $210 $140

Cash purchases (0.10) $7 $14 $ 28 $ 21 $ 14
Payments of A/P:
Lagged 1 month (0.70) 49 98 196 147
Lagged 2 months (0.20) 14 28 56
Rent payments 5 5 5
Wages and salaries 48 38 28
Tax payments 25
Fixed-asset outlays 130
Interest payments 10
Cash dividend payments 20
Principal payments 20
Total cash disbursements $213 $418 $305
104 PART 1 Introduction to Managerial Finance

Lagged 1 month These figures represent purchases made in the preced-
ing month that are paid for in the current month. Because 70% of the firm’s
purchases are paid for 1 month later, the payments with a 1-month lag
shown for September represent 70% of the August purchases, payments for
October represent 70% of September purchases, and so on.

Lagged 2 months These figures represent purchases made 2 months ear-
lier that are paid for in the current month. Because 20% of the firm’s pur-
chases are paid for 2 months later, the payments with a 2-month lag for
October represent 20% of the August purchases, and so on.
net cash flow
The mathematical difference
Wages and salaries These amounts were obtained by adding $8,000 to
between the firm’s cash
10% of the sales in each month. The $8,000 represents the salary compo-
receipts and its cash dis-
bursements in each period. nent; the rest represents wages.
ending cash
The remaining items on the cash disbursements schedule are self-explanatory.
The sum of the firm’s begin-
ning cash and its net cash
flow for the period.
Net Cash Flow, Ending Cash, Financing, and Excess Cash
required total financing
Look back at the general-format cash budget in Table 3.7. We have inputs for the
Amount of funds needed by the
first two entries, and we now continue calculating the firm’s cash needs. The
firm if the ending cash for the
firm’s net cash flow is found by subtracting the cash disbursements from cash
period is less than the desired
minimum cash balance; typically receipts in each period. Then we add beginning cash to the firm’s net cash flow to
represented by notes payable.
determine the ending cash for each period. Finally, we subtract the desired mini-
mum cash balance from ending cash to find the required total financing or the
excess cash balance
excess cash balance. If the ending cash is less than the minimum cash balance,
The (excess) amount available
for investment by the firm if the financing is required. Such financing is typically viewed as short-term and is
period’s ending cash is greater
therefore represented by notes payable. If the ending cash is greater than the min-
than the desired minimum cash
imum cash balance, excess cash exists. Any excess cash is assumed to be invested
balance; assumed to be invested
in a liquid, short-term, interest-paying vehicle—that is, in marketable securities.
in marketable securities.

Table 3.10 presents Coulson Industries’ cash budget, based on the data already
developed. At the end of September, Coulson’s cash balance was $50,000, and its
notes payable and marketable securities equaled $0. The company wishes to
maintain, as a reserve for unexpected needs, a minimum cash balance of $25,000.
For Coulson Industries to maintain its required $25,000 ending cash balance,
it will need total borrowing of $76,000 in November and $41,000 in December.
In October the firm will have an excess cash balance of $22,000, which can be
held in an interest-earning marketable security. The required total financing
figures in the cash budget refer to how much will be owed at the end of the
month; they do not represent the monthly changes in borrowing.
The monthly changes in borrowing and in excess cash can be found by fur-
ther analyzing the cash budget. In October the $50,000 beginning cash, which
becomes $47,000 after the $3,000 net cash outflow, results in a $22,000 excess
cash balance once the $25,000 minimum cash is deducted. In November the
$76,000 of required total financing resulted from the $98,000 net cash outflow
less the $22,000 of excess cash from October. The $41,000 of required total
financing in December resulted from reducing November’s $76,000 of required
total financing by the $35,000 of net cash inflow during December. Summariz-
ing, the financial activities for each month would be as follows:
CHAPTER 3 Cash Flow and Financial Planning

TABLE 3.10 A Cash Budget for Coulson
Industries ($000)

Oct. Nov. Dec.

Total cash receiptsa $210 $320 $340
Less: Total cash 213 418 305
Net cash flow ($ 3) ($ 98) $ 35
Add: Beginning cash 50 47 ( 51)
Ending cash $ 47 ($ 51) ($ 16)
Less: Minimum cash balance 25 25 25
Required total financing (notes payable)c — $ 76 $ 41
Excess cash balance (marketable $ 22 — —

aFrom Table 3.8.
bFrom Table 3.9.
cValues are placed in this line when the ending cash is less than the desired minimum cash
balance. These amounts are typically financed short-term and therefore are represented by
notes payable.
dValues are placed in this line when the ending cash is greater than the desired minimum
cash balance. These amounts are typically assumed to be invested short-term and there-
fore are represented by marketable securities.

October: Invest the $22,000 excess cash balance in marketable securities.
November: Liquidate the $22,000 of marketable securities and borrow
$76,000 (notes payable).
December: Repay $35,000 of notes payable to leave $41,000 of outstand-
ing required total financing.

Evaluating the Cash Budget
The cash budget indicates whether a cash shortage or surplus is expected in each
of the months covered by the forecast. Each month’s figure is based on the inter-
nally imposed requirement of a minimum cash balance and represents the total
balance at the end of the month.
At the end of each of the 3 months, Coulson expects the following balances
in cash, marketable securities, and notes payable:

balance ($000)

Account Oct. Nov. Dec.

Cash $25 $25 $25
Marketable securities 22 0 0
Notes payable 0 76 41
106 PART 1 Introduction to Managerial Finance

Note that the firm is assumed first to liquidate its marketable securities to meet
deficits and then to borrow with notes payable if additional financing is needed.
As a result, it will not have marketable securities and notes payable on its books
at the same time.
Because it may be necessary to borrow up to $76,000 for the 3-month
period, the financial manager should be certain that some arrangement is made to
ensure the availability of these funds.

Coping with Uncertainty in the Cash Budget
Aside from careful estimation of cash budget inputs, there are two ways of coping
with the uncertainty of the cash budget.6 One is to prepare several cash budgets—
based on pessimistic, most likely, and optimistic forecasts. From this range of
cash flows, the financial manager can determine the amount of financing neces-
sary to cover the most adverse situation. The use of several cash budgets, based on
differing assumptions, also should give the financial manager a sense of the riski-
ness of various alternatives. This sensitivity analysis, or “what if” approach, is
often used to analyze cash flows under a variety of circumstances. Computers and
electronic spreadsheets simplify the process of performing sensitivity analysis.

Table 3.11 presents the summary of Coulson Industries’ cash budget prepared for
each month of concern using pessimistic, most likely, and optimistic estimates of
total cash receipts and disbursements. The most likely estimate is based on the
expected outcomes presented earlier.

TABLE 3.11 A Sensitivity Analysis of Coulson Industries’ Cash Budget ($000)

October November December

Pessi- Most Opti- Pessi- Most Opti- Pessi- Most Opti-
mistic likely mistic mistic likely mistic mistic likely mistic

Total cash
receipts $160 $210 $285 $210 $320 $ 410 $275 $340 $422
Less: Total cash
disbursements 200 213 248 380 418 467 280 305 320
Net cash flow ($ 40) ($ 3) $ 37 ($170) ($ 98) ($ 57) ($ 5) $ 35 $102
Add: Beginning
cash 50 50 50 10 47 87 ( 160) ( 51) 30
Ending cash $ 10 $ 47 $ 87 ($160) ($ 51) $ 30 ($165) ($ 16) $132
Less: Minimum
cash balance 25 25 25 25 25 25 25 25 25
Required total
financing $ 15 — — $185 $ 76 — $190 $ 41 —
Excess cash
balance — $ 22 $ 62 — — $ 5 — — $107

6. The term uncertainty is used here to refer to the variability of the cash flow outcomes that may actually occur.
CHAPTER 3 Cash Flow and Financial Planning

During October, Coulson will, at worst, need a maximum of $15,000 of
financing and, at best, will have a $62,000 excess cash balance. During Novem-
ber, its financing requirement will be between $0 and $185,000, or it could
experience an excess cash balance of $5,000. The December projections show
maximum borrowing of $190,000 with a possible excess cash balance of
$107,000. By considering the extreme values in the pessimistic and optimistic
outcomes, Coulson Industries should be better able to plan its cash requirements.
For the 3-month period, the peak borrowing requirement under the worst cir-
cumstances would be $190,000, which happens to be considerably greater than
the most likely estimate of $76,000 for this period.

A second and much more sophisticated way of coping with uncertainty in the
cash budget is simulation (discussed in Chapter 9). By simulating the occurrence
of sales and other uncertain events, the firm can develop a probability distribu-
tion of its ending cash flows for each month. The financial decision maker can
then use the probability distribution to determine the amount of financing needed
to protect the firm adequately against a cash shortage.

Review Questions

3–9 What is the purpose of the cash budget? What role does the sales forecast
play in its preparation?
3–10 Briefly describe the basic format of the cash budget.
3–11 How can the two “bottom lines” of the cash budget be used to determine
the firm’s short-term borrowing and investment requirements?
3–12 What is the cause of uncertainty in the cash budget, and what two tech-
niques can be used to cope with this uncertainty?

Profit Planning: Pro Forma Statements

Whereas cash planning focuses on forecasting cash flows, profit planning relies on
accrual concepts to project the firm’s profit and overall financial position. Share-
holders, creditors, and the firm’s management pay close attention to the pro forma
pro forma statements
Projected, or forecast, income statements, which are projected, or forecast, income statements and balance
statements and balance sheets.
sheets. The basic steps in the short-term financial planning process were shown in
the flow diagram of Figure 3.2. Various approaches for estimating the pro forma
statements are based on the belief that the financial relationships reflected in the
firm’s past financial statements will not change in the coming period. The com-
monly used simplified approaches are presented in subsequent discussions.
Two inputs are required for preparing pro forma statements: (1) financial
statements for the preceding year and (2) the sales forecast for the coming year. A
variety of assumptions must also be made. The company that we will use to illus-
trate the simplified approaches to pro forma preparation is Vectra Manufactur-
ing, which manufactures and sells one product. It has two basic product mod-
els—X and Y—which are produced by the same process but require different
amounts of raw material and labor.
108 PART 1 Introduction to Managerial Finance

TABLE 3.12 Vectra Manufacturing’s Income
Statement for the Year Ended
December 31, 2003
Sales revenue
Model X (1,000 units at $20/unit) $20,000
Model Y (2,000 units at $40/unit) 80,000
Total sales $100,000
Less: Cost of goods sold
Labor $28,500
Material A 8,000
Material B 5,500
Overhead 38,000
Total cost of goods sold 80,000
Gross profits $ 20,000
Less: Operating expenses 10,000
Operating profits $ 10,000
Less: Interest expense 1,000
Net profits before taxes $ 9,000
Less: Taxes (0.15 $9,000) 1,350
Net profits after taxes $ 7,650
Less: Common stock dividends 4,000
To retained earnings $ 3,650

Preceding Year’s Financial Statements
The income statement for the firm’s 2003 operations is given in Table 3.12. It
indicates that Vectra had sales of $100,000, total cost of goods sold of $80,000,
net profits before taxes of $9,000, and net profits after taxes of $7,650. The firm
paid $4,000 in cash dividends, leaving $3,650 to be transferred to retained earn-
ings. The firm’s balance sheet for 2003 is given in Table 3.13.

TABLE 3.13 Vectra Manufacturing’s Balance Sheet,
December 31, 2003

Assets Liabilities and Stockholders’ Equity

Cash $ 6,000 Accounts payable $ 7,000
Marketable securities 4,000 Taxes payable 300
Accounts receivable 13,000 Notes payable 8,300
Inventories 16,000 Other current liabilities 3,400
Total current assets $39,000 Total current liabilities $19,000
Net fixed assets $51,000 Long-term debt $18,000
Total assets $90,000 Stockholders’ equity
Common stock $30,000
Retained earnings $23,000
Total liabilities and
stockholders’ equity $90,000
CHAPTER 3 Cash Flow and Financial Planning

TABLE 3.14 2004 Sales
for Vectra
Unit sales
Model X 1,500
Model Y 1,950

Dollar sales

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