Cash Flow

Discuss the four methods of reporting cash flow.

Discussion Guidelines

Remember to use citations and references as appropriate. Your post should be of at least 250 words in length and in appropriate APA style.

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EXAMPLE:

Capital budgeting analysis methods are used by accountants and managers to examine the potential of proposed long-term projects (Boundless.com, 2014). The goal is to choose projects that have the greatest potential to increase the businesses profits. The four capital budgeting analysis methods of reporting cash flow include:

Payback Method:  The payback method is used to calculate the amount of time it will take an institution to earn back its investment in a capital project.  This method does not take the time value of money into consideration (Baker and Baker, 2014).  For example, the cost of a piece of equipment costs $100,000.  If that piece of equipment brings revenue of $20,000 per year, it will take five years to earn or “payback” that initial investment.  The time value of money or the ability to earn interest income is not taken into consideration in this method.

Accounting Rate of Return:  The Accounting Rate of Return is a method based on profitability. It is used to determine the expected income during the life of the project.  It is based on the ratio of the estimated profit to the investment made to the project (Baker and Baker, 2014). Since the Accounting Rate of Return is used as an investment assessment, the analysis must show a positive overall return if an institution is to approve such a project.  This method does not consider the time value of money.

Net Present Value:  Net Present Value is a discounted cash flow method that takes into consideration all incoming and outgoing cash over the life of the equipment or project in question (Baker and Baker, 2014). Net Present Value looks at the present value of investment based on expected income minus the cost of the project.  The analysis will show the value of the cash flow stream.  It determines the potential profit of the project and considers time value of money.

Internal Rate of Return:  Similar to Net Present Value, the Internal Rate of Return is also a discounted cash flow method.  It considers incoming and outgoing cash flow over the life of the equipment or project in question (Baker and Baker, 2014). It determines the percentage rate on each dollar invested and identifies the rate of return to be achieved based on the stream of cash flows.  This method gives businesses the information needed to compare investment options. This method considers profitability and time value of money.

References

Baker, J.J., & Baker, R.W. (2014). Health care finance: Basic tools for nonfinancial managers (4th ed.). Capital expenditure budgets. Sudbury, MA: Jones and Bartlett Publishers.

Baker, J.J., & Baker, R.W. (2014). Health care finance: Basic tools for nonfinancial managers (4th ed.). The time value of money. Sudbury, MA: Jones and Bartlett Publishers.

Boundless.com (2014).  What is capital budgeting?. Retrieved from:  https://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/what-is-capital-budgeting-390-8292/.