Dr. HERRY ACHMAD BUCHORY, SE,MM.

SEKOLAH TINGGI ILMU EKONOMI

EKUITAS - BANDUNG
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.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-2

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.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-3

}  Cash flow (as opposed to accounting “profits”) is
the primary focus of the financial manager.
}  An important factor affecting cash flow is
depreciation.
}  From an accounting perspective, cash flow is
summarized in a firm’s statement of cash flows.
}  From a financial perspective, firms often focus on
both operating cash flow, which is used in
managerial decision-making, and free cash flow,
which is closely monitored by participants in the
capital market.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-4

}  Depreciation is the systematic charging of a
portion of the costs of fixed assets against
annual revenues over time.
}  Depreciation for tax purposes is determined
by using the modified accelerated cost
recovery system (MACRS).
}  On the other hand, a variety of other
depreciation methods are often used for
reporting purposes.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-5

}  Financial managers are much more
concerned with cash flows rather than
profits.
}  To adjust the income statement to show
cash flows from operations, all non-cash
charges should be added back to net profit
after taxes.
}  By lowering taxable income, depreciation
and other non-cash expenses create a tax
shield and enhance cash flow.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-6

}  Under the basic MACRS procedures, the depreciable
value of an asset is its full cost, including outlays 

for installation.
}  No adjustment is required for expected salvage
value.
}  For tax purposes, the depreciable life of an 

asset is determined by its MACRS recovery
predetermined period.
}  MACRS property classes and rates are shown in
Table 3.1 and Table 3.2 on the following slides.

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-7

Dr. HERRY ACHMAD BUCHORY 7/6/14 3-8
Dr. HERRY ACHMAD BUCHORY 7/6/14 3-9
}  Baker Corporation acquired, for an installed cost of
$40,000, a machine having a recovery period of 5
years. Using the applicable MACRS rates, the
depreciation expense each year is as follows:

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 0
}  The statement of cash flows summarizes
the firm’s cash flow over a given period of
time.
}  The statement of cash flows is divided into 

three sections:
◦  Operating flows
◦  Investment flows
◦  Financing flows
}  The nature of these flows is shown in Figure
3.1 on the following slide.

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 1
The firm’s Cash Flows divided into :
q  Operating Flows : cash flows directly related to
production and sale of the firm’s product and
service.
q  Investment Flows : cash flows associated with
purchase and sale of both fixed assets and
business interests.
q  Financing Flows : cash flow that result from debt
and equity financing transactions; includes
incurrence and repayment of debt, cash inflow
from the sale of stock, and cash outflows to pay
cash dividends or repurchase stock.

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 2
 Categories and data items Data source
S/U= Statement of
sources and uses of cash
I/S= Income Statement

Cash Flow from Operating Activities

• Net profits (losses) after taxes I/S

• Depreciation and other noncash charges I/S

• Changes in all current assets other than cash and S/U

marketable securities
• Changes in all current liabilities other than notes S/U
payable
Cash Flow from Investment Activities
• Changes in gross fixed assets S/U

• Changes in business interests S/U

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 3
 Categories and data items Data source
S/U= Statement of
sources and uses of cash
I/S= Income Statement

Cash Flow from Financing Activities

• Changes in notes payable S/U

• Changes in long-term debt S/U

• Changes in business stockholders’ equity other than S/U

retained earnings
• Dividend paid I/S

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 4
 3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 5
}  The statement of cash flows essentially
summarizes the inflows and outflows of cash
during a given period.

3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 6
 3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 7
 3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 8
 3-1
Dr. HERRY ACHMAD BUCHORY 7/6/14 9
 3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 0
}  The statement of cash flows ties the balance
sheet at the beginning of the period with
the balance sheet at the end of the period
after considering the performance of the
firm during the period through the income
statement. (Pernyataan arus kas merupakan
hubungan neraca pada awal periode dengan
neraca pada akhir periode setelah
mempertimbangkan kinerja perusahaan
selama periode melalui laporan laba rugi).

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 1
}  The net increase (or decrease) in cash and
marketable securities should be equivalent
to the difference between the cash and
marketable securities on the balance sheet
at the beginning of the year and the end of
the year. (Peningkatan bersih (atau
penurunan) kas dan surat berharga harus
setara dengan perbedaan antara kas dan
surat berharga dalam neraca pada awal
tahun dan akhir tahun).

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 2
}  A firm’s Operating Cash Flow (OCF) is the
cash flow a firm generates from normal
operations—from the production and sale
of its goods and services.
}  OCF may be calculated as follows:

NOPAT = EBIT x (1 – T)

OCF = NOPAT + Depreciation

OCF = [EBIT x (1 – T)] + Depreciation

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 3
}  Substituting for Baker Corporation, we get:

OCF = [$370 x (1 - .40) + $100 = $322

}  Thus, we can conclude that Baker’s
operations are generating positive operating
cash flows.

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 4
}  Free Cash Flow (FCF) is the amount of cash flow
available to debt and equity holders after meeting
all operating needs and paying for its net fixed
asset investments (NFAI) and net current asset
investments (NCAI).

FCF = OCF – NFAI - NCAI

}  Where:

NFAI = Change in net fixed assets + Depreciation

NCAI = Change in CA – Change in A/P and Accruals

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 5
}  Using Baker Corporation we get:
NFAI = [($1,200 - $1,000) + $100] = $300

NCAI = [($2,000 - $1,900) + ($800 - $700)] = $0

FCF = $322 – $300 - $0 = $22

}  This FCF can be used to pay its creditors and
equity holders.

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 6
 Account 2010 2009 Change Source Use

Assets

Cash 400 300 +100 100

Marketable securities 600 200 +400 400

Account receivable 400 500 -100 100

Inventories 600 900 -300 300

Gross fixed assets 2,500 2,200 +300 300

Accumulated depreciations 1,300 1,200 +100 100

Liabilities

Account payable 700 500 +200 200

Notes payable 600 700 -100 100

Accruals 100 200 -100 100

Long-term debt 600 400 +200 200

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 7
 Account 2010 2009 Change Source Use

Stockholders’ equity

Preferred stocks 100 100 0

Common stock at par 120 120 0

Paid-in capital in excess 380 380 0

Retained Earning 600 500 +100 100

Totals 1,000 1,000

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 8
Cash Flow from Operating Activities
• Net profits (losses) after taxes 180

• Depreciation 100

• Decrease in account receivable 100

• Decrease in inventories 300

• Increase in account payable 200

• Decrease in accrual (100)

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)

3-2
Dr. HERRY ACHMAD BUCHORY 7/6/14 9
Cash Flow from Financing Activities
• Decrease in notes payable (100)

• Increase in long-term debts 200

• Changes in stockholders’ equity 0

• Dividends paid (80)

Cash provided by financing activities 20

Net increase in cash and marketable securities 500

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 0
 Account 2010 2009 Change Source Use

Assets

Cash 30 50 -20 20

Marketable securities 10 20 -10 10

Account receivable 320 350 -30 30

Inventories 460 320 +140 140

Gross fixed assets 560 520 +40 40

Accumulated depreciations 180 150 +30 30

Liabilities

Account payable 390 320 +70 70

Notes payable 110 90 +20 20

Accruals 20 20 0

Long-term debt 320 350 -30 30

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 1
 Account 2010 2009 Change Source Use

Stockholders’ equity

Preferred stocks 0 0 0

Common stock at par 100 100 0

Paid-in capital in excess 150 150 0

Retained Earning 110 80 +30 30

Totals 210 210

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 2
Cash Flow from Operating Activities
• Net profits (losses) after taxes (RE + Dividen Paid (30+76) 106

• Depreciation 30

• Decrease in account receivable 30

• Increase in inventories (140)

• Increase in account payable 70

• Decrease in accrual 0

Cash provided by operating activities 96

Cash Flow from Investment Activities

• Increase in gross fixed assets (40)

• Changes in business interests 0

Cash provided by investment activities (40)

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 3
Cash Flow from Financing Activities
• Increase in notes payable 20

• Decrease in long-term debts (30)

• Changes in stockholders’ equity 0

• Dividends paid (76)

Cash provided by financing activities (86)

Net increase in cash and marketable securities (30)

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 4
TERIMA KASIH

3-3
Dr. HERRY ACHMAD BUCHORY 7/6/14 5