Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach - Math Problem Example

Comments (1) Cite this document
Cash flows are the finances a corporation acquires from its daily sales and spends it in the operations of the business at that particular period. It is the liquidity position of the company and does not constitute for sales credit (Mulford & Comiskey, 2005). …
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER93.8% of users find it useful
Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach
Read TextPreview

Extract of sample "Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach"

Download file to see previous pages Moreover, it involves financial instruments such as inventory, which the corporation can easily convert into money. The cash flow statement can highlight the economic position of the firm and its solvency capacity within that financial period. Alternatively, the accounting profits refer to the gain or loss of the investment of the entrepreneur after the accumulative revenues are subtracted from the expenses (Profit ? = Revenues – Expenses). In addition, the net income is for the whole year (Wayman, 2010). For most corporations, revenues are realized when the money is earned but not received. This means some items can be sold on credit and recorded on the Income Statement as sales even if the money is not actually received. Why Caledonia has to adopt free Cash flows approach and not Accounting profit approach According to Mulford & Comiskey (2005), both the cash flow methods and accounting profits are methods that corporations use to assess their economic performance. However, the concepts of computing these two formulas are different and constitutes of different elements. Cash flows have several qualities that make it preferable than the accounting profits. First, cash flows consider the time value of transactions and money, which is important for the business. It considers the money value in a particular period has a different purchasing power than in a future period. Clearly, numerous economic conditions influence the fluctuation of prices and the accounting profits do not consider this. They assume the price remains constant for a particular economic period. For example, oil prices are affected by global factors such as depletion of oil wells, shortages or regulations, which cause the frequent alteration of the prices to meet the contemporary financial situations. In this instance, the cash flow approach will realize the inflows and expenditures of the new prices of the commodity according to the time of occurrence. Whereas the accounting profit model ignores this and uses the average price of the year in computing its revenues. Therefore, the corporation will be able to measure their liquidity situation more efficiently and thus this will help them in planning their operational functions better. Besides the cash flow model emphasizes real time payment unlike accounting profit is realized later ((Mulford & Comiskey, 2005)). If the corporation acquires finances directly after sales, they can use it when a great opportunity arises. They will not have to postpone their prospects since they have sold items on credit and do not have the actual money. Secondly, the accounting profit approach considers depreciation as an expense item and this is not an actual expense item (Mulford & Comiskey, 2005). Therefore, if the depreciation increases this will mean that the expenses will increase but this is not reflective of the true expense of the business. It is a non-cash amount that the corporation assumes it affects the profitability of the business. However, the cash flows ignore depreciation as cash expense since it does not have a monetary value. If Caledonia utilizes the cash flow approach, its profits will be higher and reflect the true cash position of the business, unlike a net profit figure which will be lower since it comprises of depreciation. Finally, the cash flow method is essential for capital budgeting which requires comparison of the benefits and costs (outflows) of the investment they are taking (Wayman, 2010). Since the cash flow method considers the cash values of the projects, it can be an appropriate basis to calculate the financial progress of the investment. Consequently, the accounting method disregards the cost at the time of initiation of the project. The ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Math Problem”, n.d.)
Retrieved from https://studentshare.org/finance-accounting/1453905-week
(Why Caledonia Has to Adopt Free Cash Flows Approach and Not Accounting Math Problem)
“Why Caledonia Has to Adopt Free Cash Flows Approach and Not Accounting Math Problem”, n.d. https://studentshare.org/finance-accounting/1453905-week.
  • Cited: 0 times
Comments (1)
Click to create a comment or rate a document
eichmannrichie added comment 2 months ago
Student rated this paper as
At first, I thought 8 of pages is too much for such a question. But now I see it could not be done better. As the author starts you see the complexity of the subject. I’ve read all at once. Great paper

CHECK THESE SAMPLES OF Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach

Embracing cash flows

...? What is the superiority of cash flow ratios and how they can predict corporate failure? How is the analysis of UK companies done? Why some other base of ratios cannot be taken up for analysis? What is the use of financial statements to predict future success or failure? Part 4: Research Design 4a: Methodology: By reading through the material on cash flow ratio analysis Calculating the ratios and revealing analysis through comparison with preferable standards Checking through the benchmark financial ratios Evaluating the purpose of such ratio analysis 4b: Subjects, Respondents and Key Informants: Subjects: Financial accountant,...
3 Pages(750 words)Dissertation

Entrepreneurial Approach to Profit and Social Responsibility

...a lot on social responsibility, the Small Business Administration and SCORE tools/resources most applicable include customer relations, sales marketing and PR, and Franchising. The entrepreneur needs to understand how to balance social responsibility and profit making. Furthermore, the leader may gain morn sight into the business of franchising. Rich Gorman’s Strategies to Improve Company Profits Rich Gorman has been the driving force behind Sandra Training Company due to his well structured approach to win the loyalty of his customers. He uses direct response marketing strategy where consumers are directly dealt with without having to involve the middle man. This...
5 Pages(1250 words)Research Paper

Capital Budgetting of Caledonia Products

...?CAPITAL BUDGETTINGH OF CALEDONIA PRODUCTS INTRODUCTION This report addresses capital budgeting for Caledonia Products. Company is planning to introduce new product to the market and company seeks to analyze the investment opportunities by using capital budgeting techniques. Capital budgeting technique use to evaluate investment proposal with respect to their feasibility. Techniques like Net Present Value, Internal rate of return and / or Profitability index are applied to analyze from various perspectives with respect to cost and benefit if project undertaken. A- Caledonia Products should focus on free cash flows for...
5 Pages(1250 words)Research Paper

Statements of cash flows

...My Position It is important to cash equivalent as quite different from cash. Moreover, cash equivalent are not only short-term securities but they are liquid. For a case of IFRM it was considered that an investment is cash equivalent only when it has a very short term maturity of three months or fewer months from the time it was acquired. Here, borrowing is considered a financing activity and since overdrafts are borrowings for a short time, they are thus added to cash flow statement. Moreover, they are included in cash flow statement because their payment is based on demand from...
7 Pages(1750 words)Research Paper

Management accounting - contemporary approach

...is that balanced scorecard focuses entirely on internal processes within the organisation and fails to provide much information to management concerning the competitive world. Furthermore, the BSC has also been criticised for being too inflexible in its approach making it difficult for the managers to adopt the system. Budgeting and Managerial Behaviour The behavioural accounting research (Parker et al., 1989) has also developed swiftly during the past few decades. The conventional behavioural theory investigated into control measures adopted by organisations and their relationship in driving positive or negative behaviour on the part...
18 Pages(4500 words)Essay

Construction of the cash flows

...INTRODUCTION There often confusion as which money outflow should be included as capital assets and which money outlays are part of operating expenses. Research and development expenses, electricity, water, light and office rent are usual items falling under operating expenses. Here, the proper identification of airline ticket costs are discussed on the basis of capitalization and operating expenses(Rigeorgis, 1995;p31-40) BODY: Theory of Accounts The cash flow statement can be defined as that part of the financial statements that gives information on the total cash receipts ( or inflows) and total cash disbursements ( or outflows) of an enterprise during a particular accounting period which is usually one year. The users... of the...
4 Pages(1000 words)Essay

Reporting and Analyzing Cash Flows

...Cash Flow Analysis and Report Grade Cash Flow Report Profit Expenses Net Sales $ 348 600.00 Depreciation expense $ 25 620.00Cash Collected from sales $ 758 100.00 Other expenses $ 274 995.00 Cost of goods sold $ 409 500.00 Loss on equipment sale $ 1 470.00 Income from operations $ 46 515.00 Equipment Purchase $ 26 775.00 income tax $ 6 615.00 Net Income $ 39 900.00 Borrowed $ 4 200.00 Shares Issued $ 23 100.00 Total Expenses $ 328 860.00 Net Cash After Operations $ 86 940.00 Assets Liabilities Cash $ 95 550.00 Prepaid Expenses $ 11 970.00 Merchandise Inventory $ 318 150.00 Equipment $ 194 775.00 Common shares $ 338...
2 Pages(500 words)Assignment

Cash Flows in Business Organisations

...CASH FLOWS IN BUSINESS ORGANISATIONS Table of Contents Introduction 4 Task 4 Task 2 5 Task 3 6 a. Operating Activities 6 b. Working Capital 7 c. Financing Activities 7 d. Investment Activities 8 Task 4 8 Conclusion 9 References 10 Appendix 11 Table 1- Consolidated Income Statement of US Airways 11 Table 2- Consolidated Statement of Cash Flow of US Airways 11 Table 3- Consolidated Income Statement of United Airlines 13 Table 4- Consolidated Statement of Cash Flow of United Airlines 14 Introduction The Income Statement of a company shows the revenue earned, gross profit, operating profit and net profit for a particular period of time based on ‘accrual accounting’ concept. The true position of cash is reflected from the consolidated... ...
4 Pages(1000 words)Coursework


...Accounting Task Table of Contents Accounting Table of Contents 2 Introduction 3 Explanations of the difference between net profit and net cash flow within a financial period 3 Difference between direct and indirect cash flow presentation 4 Comparison of the cash flow statements of Vivendi Universal France Media and Lagardere Sca France Media for the year 2011 and 2012 4 Appendix A: indirect method of cash flow (Company L) 8 Appendix B: direct method for cash flow (Company T) 8 Appendix 2: Vivendi Universal’s...
5 Pages(1250 words)Coursework

Statement of Cash Flows

...). Furthermore, a cash flow statement is mainly based on the actual cash concept; thus it is a critical tool for liquidity analysis of a company (Rich, Jones, Mowen, & Hansen, 2013). Users of the company’s annual financial reports can get a glance of the liquidity position of the company by looking at the statement of cash flows. This statement also helps in streamlining a company’s internal financial management by providing information on the cash flow analysis of the company. Finally, the cash flow statement assists users of the annual financial report to examine the relationship...
1 Pages(250 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Math Problem on topic Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach for FREE!

Contact Us