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■ the concern in chapter 3 and chapter 8:

    1) Accounting earnings or profits are different from the cash flows tracked by
       financial analysts.
    2) Calculate (derive) cash flows by using accounting data shown on the
       balance sheet and the income statement.

Ch. 3 Accounting and Finance
3-1 The Balance Sheet
■   current assets (流動資產) = Cash + Accounts Receivable + Inventories +
                                  Other Current Assets
    a note: 這些 short-term asset accounts 代表企業額外的短期「投資支出」(機


■   current liabilities (流動負債) = Accounts Payable + Other Current Liabilities
    notes: 1) Other Current Liabilities 包括應付稅款等項目
            2) 這些 short-term liability accounts 代表供應商或其他人給企業的短期週

■   (net) working capital (流動資本) = current assets – current liabilities

    a note: 流動資本代表企業淨的短期「投資支出」

■   book values (帳面價值) and market values (市場價值)
    ●   Items in the balance sheet are valued according to generally accepted
        accounting principles (GAAP, 一般公認會計準則).

    ●   GAAP states that assets must be shown in the balance sheet at their
        historical costs adjusted for depreciation and liabilities must be shown at
        their original values. These costs or values are called the book values of
        assets and liabilities.

    ●   Market values measure current values of assets and liabilities.

■   Example 3.1: market-value versus book-value balance sheets

    Jupiter Motors has invested $10 billion in a new plant. It borrowed $4 billion
    and raised the remaining funds by selling new shares of stock. There are
    currently 100 million shares of stock outstanding. Investors are very excited
    about Jupiter’s prospects. The current market price of the stock is $75.

         Book-Value B/S                                   Market-Value B/S
Auto Plant    $10 | Debt               $4        Auto Plant $11.5 | Debt            $4
                   | Equity             6                           | Equity       7.5
             $10                       $10                    $11.5               $11.5

    The difference between market value and book value is due to the superior( 優
    越的) profits that investors expect the plant to earn.

3-2 The Income Statement
■ cash flow:

    1) It is just the difference between dollars received and dollars paid out.
    2) Cash flows are recorded only when they occur (cash basis 現金基礎) and not
        when the work is under taken or the liability is incurred (accrual basis 應計
    3) Estimate cash flows on after-tax basis.
       a note: taxes 必須先利用 income statement 來計算,再將此 taxes 放到為計算
                 cash flow 的表中。

■   accounting profits versus cash flows

    ●   differences:
        1) Accountants record profits as it is earned (accrual basis) and rather than it
           is received (cash basis). They do not simply count the cash coming in and
           the cash going out.
        2) Accountants divide cash payments (or cash outflows) into two groups:
           a) current expenditures
             They are deducted from current incomes.
           b) capital expenditures
             Accountants do not deduct the expenditure on new equipment in the
             year it is purchased, even though cash is paid out. However, accountants

        do deduct annual depreciation charge(折舊費用) on asset equipments
        previously purchased, even though no cash is currently paid out.

●   As a results of these two differences, profits include some cash flows and
    exclude others, and they are reduced by depreciation charge.

●   ‘Sales’ and cash inflows

    Example:    t=1         producing goods at the cost of $60
                t=2         selling goods for $100
                t=3         cash received

    The sale is included (recorded) in the income statement for period 2.
    However, the accountant recognizes the fact that the cash does not arrive
    until period 3. The figure for accounts receivable (A/R) in the balance sheet
    is adjusted to show the unpaid bills.

                                    t=2                      t=3
        + Sales                     $100                     $0
        - increase in A/R           -100                   - (-100)
        = cash received              $0                      $100

    => summary: cash received = Sales – increase in A/R

●   ‘Costs of Goods Sold’ and cash outflows

    In the example above, the expenditure of producing goods will be shown in
    period 1 as an investment in ‘Inventories.’ The income statement will not
    show the $60 as an expense of producing goods until they are sold in period

                                        t=1                       t=2
        Costs of Goods Sold             $0                        $60
        + increase in Inventories       60                       (-60)
        = cash paid out                 $60                        $0

    => summary: cash paid out = Costs of Goods Sold + increase in Inventories

Ch. 8 Using Discounted Cash-Flow Analysis to Make Investment Decisions
8-1 Discount Cash Flows, Not Profits
■ We stressed the difference between cash flows and profits in chapter 3. Here
  we stress it again.

■   stress 1: Accountants do not deduct capital expenditure when calculating the
             year’s income, but instead depreciate it over several years.

    ●   example: an investment proposal with cash flows C0 = -$2,000, C1 = $1,500,
                  C2 = $500, and with r = 10%

        1) discounting cash flows:
                                       $1,500 $500
         NPV  PV  project outlay                 $2,000  $1,776 .86  $2,000  $223 .14
                                        1.1    1.12
          => The project is worth less than it costs; it has a negative NPV.

        2) discounting accounting incomes:
           Accountants depreciate the $2,000 capital expenditures over 2 years:

                                                     Year 1       Year 2
                     Cash Inflow                     $1,500        $500
                     - Depreciation                  -1,000       -1,000
                     Accounting Income                $500        -$500

          Thus, accountants would forecast an accounting income of $500 in Year 1
          and accounting loss of $500 in Year 2.
                      $500 ( $500 )
          => NPV                    $41 .32  0
                       1.1    1.12

    ●   the message of the example:

    1) When calculating NPV, we recognize investment expenditures when they
       occur, not later when they show up as depreciation.
    2) Projects are financially attractive because of the cash they generate.
       Therefore, the focus of capital budgeting (i.e., investment decisions) must
       be on cash flows, not profits.
    3) 如果我們要利用損益表的 accounting data ,去計算 cash flows ,需要將
       depreciation expense 加回到 accounting income。

■   stress 2: Accountants try to show profit as it is earned, rather than when the
             company and the customer get around to (are going to) paying their

    ●    example: Reggie Hotspur, ace( 王 牌 的 ) computer salesman, closed a
                $500,000 sale on December 15. He gave the customer 180 days to

         An accountant will recognize Hotspur’s sale in December, even though
         cash will not arrive until June. But a financial analyst tracking cash flows
         would concentrate on the latter event.

         The financial analyst often find it convenient to calculate cash flows as

                     December                                       June
         Sales                    $500,000          Sales                     $0
         - investment in A/R       -500,000         + recovery of A/R       +500,000
         = cash flow                  $0            = cash flow             $500,000

        a note: We can think of the increase in A/R as an investment. It is effectively
                a 180-day loan to computer store.

8-2 Discount Incremental Cash Flows
■   本節的觀念:

    1) 從整體公司的角度來看待一個投資計畫。

    2) 一個好的投資計畫將會增加公司的價值,既指此投資計畫將為公司帶


■   從整體公司的角度來看待一個投資計畫
    ●   A project’s PV depends on the extra (incremental 增加的) cash flows that it

        extra cash flow = cash flow with project – cash flow without project

    ●   Example 8.2: Launch(著手、興辦) a new project
        Consider the decision by Intel to launch its Pentium 4 microprocessor. A
        successful launch could mean sales of millions of processors and several bill
        dollars in profits.

        Q: Are these profits all incremental cash flows?

        Point: Intel recognized that if it went ahead with Pentium 4, sales for its
               older Pentium 3 processors would be reduced.

        The incremental cash flows are:

            cash flows with Pentium 4               cash flows without Pentium 4
            (including lower cash flows     -       (higher cash flows form Pentium
            from Pentium 3 processors)              3 processor)

Some Things to Look out(注意) for Incremental Cash Flows from A Project
■   Include opportunity costs when using existing resources.

    Examples: 1) A new project uses land that could otherwise be sold for
                 There is no out-of-pocket(用現金支付的) costs but there is an
                 opportunity cost, that is, the value of alternative(替換的、其他的)
                 use of the land.
              2) 一個店家開一小店面的 opportunity costs?

■   Recognize the investment in working captial.

    ●   (net) working capital = short-term assets – short-term liabilities

        principal short-term assets: Cash, Accounts receivable, Inventories
        principal short-term liabilities: Accounts Payable, Notes Payable, and other

    ●   Many projects entail(伴隨) an additional investment in working capital.

Example: Before a firm can start production, it needs to invest in inventories
        of raw materials. Then, when it delivers(運送) the finished product,
       customers may be slow to pay and A/R will increase.

notes: 1) additional investment 指機器設備及廠房以外的投資支出。
         Investment in working capital, just like investments in plant and
         equipment, results in(產生、帶來結果) cash outflows.
       2) 我們注意的是 change in working capital。
         See the following example for a 3-year project:

                                t=0          t=1          t=2        t=3
        Working Capital       $60,000      $68,000      $62,000       $0

        => cash outflows resulted from(由…產生、造成) the investment in
           working capital:

                     Year         cash outflows
                      0             $60,000
                      1                8,000
                      2              -6,000
                      3              -62,000

      3) 在計算 cash flows 時而考慮 investment in working capital,事實上就
        是將會計上應計基礎的 profits,轉換成財務上的 cash flows。


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