Chapter 3 Gitman Managerial Finance

Chapter 3

Cash Flow and Financial Planning

( Learning Goals

1. Understand tax depreciation procedures and the effect of depreciation on the firm’s cash flows.

2. Discuss the firm’s statement of cash flows, operating cash flow, and free cash flow.

3. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) plans.

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. Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements.

( True/False

1. The depreciable life of an asset can significantly affect the pattern of cash flows. The shorter the depreciable life of an asset, the more quickly the cash flow created by the depreciation write-off will be received.

Answer: TRUE

Level of Difficulty: 2

Learning Goal: 1

Topic: Depreciation and Cash Flows

2. Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

Answer: FALSE

Level of Difficulty: 2

Learning Goal: 1

Topic: Depreciation and Cash Flows

3. Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

Answer: TRUE

Level of Difficulty: 2

Learning Goal: 1

Topic: Depreciation and Cash Flows

4. Business firms are permitted to systematically charge a portion of the market value of fixed assets, as depreciation, against annual revenues.

Answer: FALSE

Level of Difficulty: 2

Learning Goal: 1

Topic: Depreciation and Cash Flows

5. Given the financial manager’s preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

Answer: FALSE

Level of Difficulty: 2

Learning...