Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: Big Dog who wrote (17044)	3/29/1998 1:08:00 AM
From: Chuzzlewit	Read Replies (1) of 95453

Big Dog, actually, you are confusing profit with cash flow, and there is a big difference. The only thing that profit is good for is figuring out your taxes (which affects cash flow) and getting some gurus(?!) very excited. The financing decision effects cash flow because of interest payments and sinking fund requirements, but only the interest affects cash profits. So... Profit = Leasepayments - expenses - interest - taxes. Cash flow = profits + depreciation - debt repayment. Now, a really savvy CFO tries to minimize profits in order to decrease taxes. This is done by depreciating assets as rapidly as possible. But when it comes time to publish the annual report s/he takes the opposite tack and tries to maximize profits by depreciating assets as slowly as possible. This gives rise to timing difference which you will find on the balance sheet labeled "Deferred Income Taxes". This way you can have your cake and eat it too. Higher cash flow from slower recognition of profits for the feds, and higher profits for the investors. I hope this is clear. Regards, Paul

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