9. Las amortizaciones y las provisiones

Understanding Cash Flow and Depreciation

Introduction to Cash Flow

• The company has generated a net profit of 20 million, leading to the introduction of the concept of "cash flow" or "flujo de caja." The calculation for cash flow is straightforward.

Calculating Cash Flow

• To determine cash flow, add net profit to amortizations and provisions. In this case, cash flow equals 20 million plus 10 million in amortizations, totaling 30 million.

Definition and Importance of Cash Flow

• Cash flow is defined as the total amount generated by the company during a financial period. Understanding cash flow requires knowledge of amortization and provisions. An example involving transportation assets will clarify these concepts further.

Example: Transportation Assets

• The company owns transportation assets valued at 15 million (e.g., 15 vans worth 1 million each). The director expresses personal attachment to these vans, highlighting their initial value upon purchase.

Value Depreciation Over Time

• After one year, despite maintaining their appearance, the vans have depreciated in value from 15 million to an estimated 10 million due to wear and tear—illustrating how assets lose value over time through depreciation.

Understanding Amortization

Concept of Amortization

• Amortization represents the annual expense associated with asset depreciation over its useful life; in this case, one-third of the van's value is considered spent each year based on a three-year lifespan.

Accounting for Asset Depreciation

• All non-current investments are subject to annual depreciation that transfers from balance sheets to income statements via amortization entries—this reflects actual asset usage over time.

Tracking Depreciation Expenses

• For instance, after one year, there’s a recorded loss of value amounting to five million for the vans; this loss must be acknowledged even though it does not generate an invoice or direct payment impact on cash flow.

Provisions vs Amortizations

Nature of Provisions

• Provisions are described as “unpleasant” forms of amortization; they account for unexpected losses or damages that may occur beyond regular depreciation schedules (e.g., if vehicles were destroyed).

Handling Unexpected Losses

Understanding Provisions and Amortizations

The Concept of Provisions

• Provisions in financial statements indicate that something negative has occurred, necessitating a write-off or "throwing away" of resources.

• Unlike provisions, amortization is a planned and orderly process where costs are gradually expensed over time.

Distinction Between Amortization and Provisions

• Both amortizations and provisions do not directly impact cash flow; they are accounting entries rather than actual cash expenses.

• Amortization reflects the gradual consumption of assets already paid for, while provisions account for unexpected losses.

Historical Context of Accounting Practices

• Historically, only tangible expenses generating invoices were recorded; thus, amortizations and provisions were often overlooked.

• Businesses failed to recognize that income generation required expenditures on personnel, rent, interest, taxes, and depreciation of non-current assets.

Consequences of Ignoring Asset Depreciation

• Neglecting to account for asset depreciation led many businesses to bankruptcy as they miscalculated their profits by failing to consider necessary replacements.

Importance in Financial Management