Summary FIN3702 Working_capital_management_notes

WORKING CAPITAL MANAGEMENT Study unit 1: Analysing the company’s cash flow Depreciation – the systematic charging of a portion of the costs of fixed assets against annual revenues over time. WTA -Wear and tear allowance determined by SARS. They apply to both new and used assets. Depreciable value of an asset is its cost plus outlays for installation; an adjustment is expected for salvage value. Land and buildings are not depreciable. Depreciable life of an asset – The time period over which the asset is depreciated. Financial managers prefer faster receipts of cash flows so they prefer a shorter depreciable life. Depreciation methods  Straight line  Diminishing balance  Sum of the years digits Depreciation is written off proportionately for a part of the year if not acquired at the beginning of the year. Developing the statement of cash flow Note that cash equivalents (marketable securities) are considered the same as cash because of their high liquidity. Both cash and cash equivalents are a reservoir of liquidity that is increased by cash inflows and decreased by cash outflows. 3 Cash flows Operating flows – cash flows directly related to sale and production of the firms products and services. Investment flows – cash flows associated with purchase and sale of both fixed assets and equity investments in other firms. Financing flows – cash flows that result from debt and equity finance transactions; includes the incurrence and repayment of debt, cash inflow from the sale of stock, as well as cash outflows to repurchase stock or pay cash dividends. Incurring debt = inflow Repaying debt = outflow Selling the firms shares = inflow