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ACCOUNTING CONCEPTS

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

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ACCOUNTING CONCEPTS

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  1. ACCOUNTING CONCEPTS

  2. 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

  3. 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

  4. 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

  5. DISCUSSION OF CATEGORIES • 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

  6. DISCUSSION OF CATEGORIES • FIXED CAPITAL (DEPRECIABLE) • WORKING CAPITAL (NOT DEPRECIABLE) • INVENTORIES OF RAW MATERIALS AND FINISHED GOODS • GOODS IN PROCESS (ESTIMATED VALUES) • SALVAGE (SUBTRACTED FROM DEPRECIABLE TOTAL)

  7. DISCUSSION OF CATEGORIES • 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

  8. DISCUSSION OF CATEGORIES • 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

  9. DISCUSSION OF CATEGORIES • 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

  10. DISCUSSION OF CATEGORIES • 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

  11. DISCUSSION OF CATEGORIES • COST OF MANUFACTURE, COM • POSITVE VALUES CONSIDERED AS NEGATIVE CASH FLOWS • VARIABLE COSTS • RAW MATERIALS • ENERGY • UTILITY CREDITS • OTHER PRODUCTION BASED CONSUMABLES

  12. DISCUSSION OF CATEGORIES • FIXED COSTS INCLUDE • INSURANCE • PROPERTY TAXES (NOT INCOME TAXES) • CORPORATE AND PLANT OVERHEAD http://www.learnenglish.org.uk/images/taxman.gif

  13. DISCUSSION OF CATEGORIES • 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

  14. DISCUSSION OF CATEGORIES • REGULATED COSTS • HAVE A FIXED AND VARIABLE CHARACTER • LABOR • LABORATORY • PLANT AND CORPORATE OVERHEAD SUCH AS CORPORATE RESEARCH

  15. DISCUSSION OF CATEGORIES • 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

  16. DISCUSSION OF CATEGORIES • 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

  17. DISCUSSION OF CATEGORIES • 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

  18. DISCUSSION OF CATEGORIES • 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

  19. DISCUSSION OF CATEGORIES • 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)

  20. DISCUSSION OF CATEGORIES • 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

  21. DISCUSSION OF CATEGORIES • 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

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