Course Outline
Join PRO

Should capital budgeting decisions be based on cash flows or revenues and expenses?

Author:
Harold Averkamp, CPA, MBA

Definition of Capital Budgeting Decisions

Capital budgeting assists in the investment decisions regarding assets that will have an impact on more than one year.

Some capital budgeting models use cash flows that are discounted for the time value of money. The time value of money recognizes that a dollar today is more valuable than a dollar received in the future. Other capital budgeting models use cash flows without discounting them, while others use the accrual accounting revenues and expenses and also ignore the time value of money.

Since the investments have an impact over many years, the preferred methods for capital budgeting decisions are those which use discounted cash flows. (In addition to using the discounted cash flow models, a company is likely to also calculate some non-discounted accrual accounting amounts to see how the investments will impact its future

  • Internal rate of return
  • Net present value
  • The discounting of cash flows can be done using computer software, financial calculators, or present value factors.

    The capital budgeting models that do not recognize the time value of money include the following:

    • Payback period which uses the cash flow amounts but ignores the time value of money by not discounting the future cash flows
    • Return on investment (ROI) which uses the accrual accounting revenues and expenses (not the cash flows) and also ignores the time value of money
    Join PRO to Track Progress
    Must-Watch Video

    Learn How to Advance Your Accounting and Bookkeeping Career

    • Perform better at your current job
    • Refresh your skills to re-enter the workforce
    • Pass your accounting class
    • Understand your small business finances
    Watch the Video

    Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

    Read all 2,645 reviews

    Features

    PRO

    PRO Plus

    Features
    Lifetime Access (One-Time Fee)
    Explanations
    Quizzes
    Q&A
    Word Scrambles
    Crosswords
    Bookkeeping Video Training
    Financial Statements Video Training
    Flashcards
    Visual Tutorials
    Quick Tests
    Quick Tests with Coaching
    Cheat Sheets
    Business Forms
    All PDF Files
    Progress Tracking
    Earn Badges and Points
    Certificate - Debits and Credits
    Certificate - Adjusting Entries
    Certificate - Financial Statements
    Certificate - Balance Sheet
    Certificate - Income Statement
    Certificate - Cash Flow Statement
    Certificate - Working Capital
    Certificate - Financial Ratios
    Certificate - Bank Reconciliation
    Certificate - Payroll Accounting

    About the Author

    Harold Averkamp

    For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

    Learn More About Harold

    Certificates of
    Achievement

    Certificates of Achievement

    We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

    • Debits and Credits
    • Adjusting Entries
    • Financial Statements
    • Balance Sheet
    • Income Statement
    • Cash Flow Statement
    • Working Capital and Liquidity
    • Financial Ratios
    • Bank Reconciliation
    • Payroll Accounting
    Badges and Points
    • Work towards and earn 30 badges
    • Earn points as you work towards completing our course
    View PRO Plus Features
    Course Outline
    Take the Tour Join Pro Upgrade to Pro Plus