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¶ … accounting income and cash flow? Which do we need to use when making decisions by using NPV? Explain in short.
Accounting income takes in consideration total profits; which is usually some form of total revenues minus total expenses. Cash flow is a totally different concept because it doesn't necessarily account for total income, rather it just accounts for cash out flows and in flows. For example, it may not account for various administrative costs or wages that are paid to employees and it may not account for the total income of the organization but just for one specific project.
A positive NPV is a good start -- now we need to take a closer look
Forecasting risk: How sensitive is our NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk (explain which conditions we accept the risk for both investors and company point view).
Investors generally make decisions about risk based on their own personal situation. For example, an investor close to retirement may...
The company's will also have a unique risk profile based on their current circumstances. However, both the company as well as the individual investor will have to incorporate their risk tolerance into their required rate of return for their NPV calculation. By adjusting the risk premium in the NPV calculation, both the investor and the company can also adjust
3) Sources of value: Why does this project create value for both invertors and company point view?
The project will create value for both the investors as well as the company because the required rate of return is fairly high at twelve percent and the project also has roughly another fifteen thousand in positive NPV. Thus the company will receive their required rate of return and then there is additional value for the investors that can be split up in a variety of ways depending on the individual circumstances of the relationship between the company and its investors.
4) What happens to the…
, 2009). Similar adjustments are made for items, such as expenses, taxes etc. (Stickney et al., 2009). The second section shows the cash inflows and outflows from investing. The figures shown are the changes that have occurred on the previous year. For example, if the firm makes a capital investment, the cost of that investment will be an outflow. If there is revenue created by an investment, such as the sale
Each section of the cash flow statement tells a different part of the firm's story. For example, it may be understood by management that significant amounts of their profits went into new buildings and equipment. What the cash flow statement does is isolates that information. Management and shareholders alike can extrapolate that data from the balance sheet, noting changes in fixed assets, but the presentation of the cash flow statement
This enables the company to better match its inflows and outflows. However, this also means that much of what constitutes earnings is not a direct, immediate cash flow. There are a number of items that will appear on an income statement that are either flows that have already occurred, or are flows that have not yet occurred. However, because the transaction was based in that quarter or year, it
Accounting Ethics Ethics of Accounting There have been breaches in the ethics of accounting in recent times. With that in mind, evaluate whether or not the current trend in the regulation of business establishments is favorable to ethical behavior. Supply supportive evidence to your answers (Jeter, 2003). The generally accepted principles of accounting and the standards of auditing in contemporary practice stipulate that the financial statements of any establishment should contain the following
Accounting Re: Accounting Policies The company is facing a challenge where it does not have the cash needed to pay employee salaries. Although the company shows a profit, it has negative cash flow at present. Understanding how cash accounting and accrual accounting works will highlight how this situation has come to be. Cash accounting is accounting via cash flows which is a simple methodology, typically used by small business. It is relatively
Nike In its 2016 Form 10-K, on page 106, Nike notes its policy with respect to depreciation as follows: Depreciation is determined on a straight line basis for buildings and leasehold improvements over 2 to 40 years for machinery and equipment over 2 to 15 years. Depreciation and amortization of assets used in manufacturing, warehousing, and product distribution are recorded in Cost of Sales. Depreciation and amortization of other assets are recorded in