Finance Planning

Principles of Managerial Finance Solution

Lawrence J. Gitman

CHAPTER 3

Cash Flow and Financial Planning

INSTRUCTOR’S RESOURCES

Overview

This chapter introduces the student to the financial planning process, with the emphasis on short-term (operating)

financial planning and its two key components: cash planning and profit planning. Cash planning requires

preparation of the cash budget, while profit planning involves preparation of a pro forma income statement and

balance sheet. The text illustrates through example how these budgets and statements are developed. The

weaknesses of the simplified approaches (judgmental and percent-of-sales methods) of pro forma statement

preparation are outlined. The distinction between Operating cash flow and Free cash flow is presented and

discussed. Current tax law regarding the depreciation of assets and the effect on cash flow are also described.

The firm's cash flow is analyzed through classification of sources and uses of cash. The student is guided in a

step-by-step preparation of the statement of cash flows and the interpretation of this statement.

PMF DISK

This chapter's topics are not covered on the PMF Tutor, PMF Problem-Solver, or the PMF Templates.

Study Guide

Suggested Study Guide examples for classroom presentation:

Example

1

3

Topic

Cash budgets

Pro forma financial statements

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Chapter 3 Cash Flow and Financial Planning

ANSWERS TO REVIEW QUESTIONS

3-1

The first four classes of property specified by the MACRS system are categorized by the length of the

depreciation (recovery) period are called 3-, 5-, 7-, and 10-year property:

Recovery

Period

3 years

5 years

7 years

10 years

Definition

Research and experiment equipment and certain special tools.

Computers, typewriters, copiers, duplicating equipment, cars, light duty trucks, qualified

technological equipment, and...