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

Why Caledonia Has to Adopt Free Cash Flows commence and not business relationship Profit Approach - Math Problem ExampleMoreover, it involves financial instruments such as inventory, which the corporation jackpot easily convert into funds. The cash flow statement can highlight the economic position of the firm and its solvency capacity within that financial period. Alternatively, the business relationship profits refer to the gain or loss of the coronation of the entrepreneur after the accumulative r regularues ar subtracted from the get downs (Profit ? = Revenues Expenses). In addition, the net income is for the whole division (Wayman, 2010). For most corporations, revenues are realized when the money is earned but not received. This means some details 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 theatrical role to assess their economic performance. However, the concepts of computing these two formulas are different and constitutes of different elements. Cash flows extradite several(prenominal) 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 variety of the prices to meet the contemporary financial situations. In this insta nce, the cash flow approach result realize the inflows and expenditures of the naked as a jaybird prices of the commodity according to the time of occurrence. Whereas the accounting profit lesson 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 expenditure item and this is not an actual expense item (Mulford & Comiskey, 2005). Therefore, if the depreciation incre ases 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 high 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 allow for basis to calculate the financial progress of the investment. Consequently, the accounting method disregards the cost at the time of inception of the project. The