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L E A R N I N G G O A L S 96 C ASH F LOW AND F INANCIAL P LANNING C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand how depreciation is used for both tax and financial reporting purposes; how to develop the statement of cash flows; the primacy of cash flows, rather than accruals, in financial decision making; and how pro forma financial statements are used within the firm. Information systems: You need to understand the data that must be kept to record depreciation for tax and financial report- ing; the information needs for strategic and operating plans; and what data are needed as inputs for cash-planning and profit-planning modules. Management: You need to understand the difference between strategic and operating plans, and the role of each; the impor- tance of focusing on the firm’s cash flows; and how use of pro forma statements can head off trouble for the firm. Marketing: You need to understand the central role that mar- keting plays in formulating the firm’s long-term, strategic plans, and the importance of the sales forecast as the key input for both cash planning and profit planning. Operations: You need to understand how depreciation affects the value of the firm’s plant assets; how the results of opera- tions are captured in the statement of cash flows; that opera- tions are monitored primarily in the firm’s short-term financial plans; and the distinction between fixed and variable operating costs. Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget. Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet. Cite the weaknesses of the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements. LG6 LG5 LG4 Understand the effect of depreciation on the firm’s cash flows, the depreciable value of an asset, its depreciable life, and tax depreciation methods. Discuss the firm’s statement of cash flows, oper- ating cash flow, and free cash flow. Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) financial plans. LG3 LG2 LG1 3
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97 I t’s tempting for companies to focus on short-term profitability, especially when Wall Street is watching earnings reports, looking for any signs of weakness that could send the stock plummeting. This was the dilemma facing the executive team at Best Buy, a specialty retailer of consumer electronics, home office equipment, entertain- ment software, and appliances. After four straight years of profits in this competitive retail busi- ness, revenues and quarterly earnings were falling as the economy started to downshift in fall 2000. On the planning boards was an expansion strategy that included acquiring the Musicland chain, using Best Buy stock to do so. As the stock price fell, some top managers urged founder and CEO Richard Schulze to retrench and focus on the chain’s over 400 existing stores.
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