Fin3702
Study Guide
,TOPIC 1: CASH FLOW AND FINANCIAL PLANNING
AIMS
The purpose of this topic is to develop an understanding of the role of cash flow and
financial planning in the management of a business. After completing the topic, students
should be able to:
1. Explain how depreciation for tax purposes affects the cash flows of a company.
2. Examine the statement of cash flows and identify the major sources and
applications of cash within a business.
3. Analyse cash generated from operating activities and determine the free cash
flow available to the business.
4. Explain the fundamental principles of short-term and long-term financial planning.
5. Describe the cash-planning process, including the preparation, interpretation and
application of cash budgets.
6. Explain the basic methods used to prepare projected statements of
comprehensive income and projected statements of financial position.
INTRODUCTION
Topic 1 focuses on two study units that are important for effective working-capital
management:
Study Unit 1: Analysis of the Company's Cash Flow
Study Unit 2: The Financial Planning Process
The two study units examine how financial managers plan, monitor and control the
movement of cash within an organisation. Because each study unit addresses different
aspects of financial management, they are considered separately.
STUDY UNIT 1: ANALYSING THE COMPANY'S CASH FLOW
,TUTORIAL MATTER
This study unit covers the relevant chapters and sections dealing with cash flow
analysis, depreciation, operating cash flow, free cash flow and financial planning in the
prescribed textbook.
LEARNING OUTCOMES
On completion of this study unit, students should be able to:
Describe the relationship between depreciation and a company's cash flows.
Identify and analyse the sources and uses of cash by examining cash flow
information.
Interpret a statement of cash flows and calculate operating cash flow and free
cash flow.
Explain the purpose and importance of both short-term and long-term financial
planning.
Explain how businesses plan their cash requirements and prepare and assess
cash budgets.
Prepare and interpret projected financial statements for a business.
KEY CONCEPTS
Important concepts covered in this study unit include:
Depreciable life
Depreciable amount
Residual value
Amortisation
Straight-line depreciation
Diminishing-balance depreciation
Operating cash flow
Free cash flow
, Operating activities
Investing activities
Financing activities
DISCUSSION
The financial function of an organisation encompasses activities that influence its
financial position and performance. Financial management is closely connected with
other areas of business, including economics, accounting, cost accounting and
mathematics. Although the structure of the financial function may differ between
organisations because of differences in size, ownership and industry, the fundamental
financial decisions relating to investment and financing remain important in virtually
every business.
Effective working-capital management is essential for maintaining the day-to-day
operations of a business. It also contributes to the long-term objective of creating value
for shareholders and other stakeholders. For purposes of this course, attention is
directed towards an established business that regularly prepares financial reports
relating to its activities and performance.
Cash flow is central to the continued operation of a business. A financial manager
should therefore focus on generating sufficient free cash flow so that the organisation
can meet its obligations, finance future activities and, where appropriate, make funds
available to the owners of the business.
Managing cash effectively requires determining the appropriate amount of cash needed
to support both current operations and future business plans. For example, a business
must maintain inventory at a level that corresponds with its production and sales
requirements. Excessive inventory can tie up cash, while insufficient inventory may
disrupt operations. Similarly, accounts receivable must be managed carefully to ensure
that sales made on credit are converted into cash within an appropriate period.
Study Guide
,TOPIC 1: CASH FLOW AND FINANCIAL PLANNING
AIMS
The purpose of this topic is to develop an understanding of the role of cash flow and
financial planning in the management of a business. After completing the topic, students
should be able to:
1. Explain how depreciation for tax purposes affects the cash flows of a company.
2. Examine the statement of cash flows and identify the major sources and
applications of cash within a business.
3. Analyse cash generated from operating activities and determine the free cash
flow available to the business.
4. Explain the fundamental principles of short-term and long-term financial planning.
5. Describe the cash-planning process, including the preparation, interpretation and
application of cash budgets.
6. Explain the basic methods used to prepare projected statements of
comprehensive income and projected statements of financial position.
INTRODUCTION
Topic 1 focuses on two study units that are important for effective working-capital
management:
Study Unit 1: Analysis of the Company's Cash Flow
Study Unit 2: The Financial Planning Process
The two study units examine how financial managers plan, monitor and control the
movement of cash within an organisation. Because each study unit addresses different
aspects of financial management, they are considered separately.
STUDY UNIT 1: ANALYSING THE COMPANY'S CASH FLOW
,TUTORIAL MATTER
This study unit covers the relevant chapters and sections dealing with cash flow
analysis, depreciation, operating cash flow, free cash flow and financial planning in the
prescribed textbook.
LEARNING OUTCOMES
On completion of this study unit, students should be able to:
Describe the relationship between depreciation and a company's cash flows.
Identify and analyse the sources and uses of cash by examining cash flow
information.
Interpret a statement of cash flows and calculate operating cash flow and free
cash flow.
Explain the purpose and importance of both short-term and long-term financial
planning.
Explain how businesses plan their cash requirements and prepare and assess
cash budgets.
Prepare and interpret projected financial statements for a business.
KEY CONCEPTS
Important concepts covered in this study unit include:
Depreciable life
Depreciable amount
Residual value
Amortisation
Straight-line depreciation
Diminishing-balance depreciation
Operating cash flow
Free cash flow
, Operating activities
Investing activities
Financing activities
DISCUSSION
The financial function of an organisation encompasses activities that influence its
financial position and performance. Financial management is closely connected with
other areas of business, including economics, accounting, cost accounting and
mathematics. Although the structure of the financial function may differ between
organisations because of differences in size, ownership and industry, the fundamental
financial decisions relating to investment and financing remain important in virtually
every business.
Effective working-capital management is essential for maintaining the day-to-day
operations of a business. It also contributes to the long-term objective of creating value
for shareholders and other stakeholders. For purposes of this course, attention is
directed towards an established business that regularly prepares financial reports
relating to its activities and performance.
Cash flow is central to the continued operation of a business. A financial manager
should therefore focus on generating sufficient free cash flow so that the organisation
can meet its obligations, finance future activities and, where appropriate, make funds
available to the owners of the business.
Managing cash effectively requires determining the appropriate amount of cash needed
to support both current operations and future business plans. For example, a business
must maintain inventory at a level that corresponds with its production and sales
requirements. Excessive inventory can tie up cash, while insufficient inventory may
disrupt operations. Similarly, accounts receivable must be managed carefully to ensure
that sales made on credit are converted into cash within an appropriate period.
