Ch8_slides - Financial statement: A quick review Capital...

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Ch.8 Financial statement: A quick review Capital expenditure: Purchase of new property, plant, and equipment Even though the full cost of the asset has been spent at purchase, the cost does not appear immediately as expense on the income statement Instead the cost is spread over the useful life time of the asset (except for the cost of land). This is called depreciation. Depreciation appears on both I/S and B/S. When the purchase is made the long-term asset in B/S increases by the full cost In contrast, revenue expenditures are expensed right away and the full costs appear on the income statement .. 1
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Ch.8 Depreciation: Referring to any method to spreading the historical cost of an asset across its useful time, roughly corresponding to normal wear and tear. The actual CF already occurred at the time of purchase, just once Depreciation help smooth out incomes; otherwise, a huge loss will be recorded at the time of purchase. GAAP depreciation (the one shown in accounting statements, chosen by company) is not identical to the depreciation for tax purposes (CCA, as prescribed by the Canadian Revenue Agency) Deferred tax item in the long-term liability of B/S mainly arises from this difference. The difference is temporary. Non-cash item, but affects taxable income, which in turn affects the actual CF. Need to use tax depreciation. 2
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Ch.8 8.2 The Majestic Mulch and Compost Company (MMCC): An Example Costs of test marketing (already spent): $250,000. The proposed factory site (which we own) has no resale value. Cost of the tool making machine: $800,000 (CCA calculations are based on a class 8, 20-percent rate). Production (in units) by year during 8-year life of the machine: 6,000, 9,000, 12,000, 13,000, 12,000, 10,000, 8,000, and 6,000. Price during first year is $100; price increases 2-percent per year thereafter. Production costs during first year are $64 per unit and increase at the annual inflation rate of 5-percent per year thereafter. Fixed production costs are $50,000 each year. Working capital: initially $40,000, then 15-percent of sales at the end of each year. Falls to $0 by the project’s end. 3
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Ch.8 Cash Flows of the MMCC Recall that production (in units) by year during 8-year life of the machine is given by: ( 6,000, 9,000, 12,000, 13,000, 12,000, 10,000, 8,000, 6,000 ).
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This note was uploaded on 04/24/2010 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.

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Ch8_slides - Financial statement: A quick review Capital...

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