Basic Knowledge of Railway Finance

Author: Li Yi
Editor-in-Chief: Jing Zhiwen
Publisher:
Publish Date: 2004-04-02
Features: This book is one of the "New Series Textbooks on Railway Labor Management." It aims to help labor and asset management cadres master the basic knowledge of railway financial management, striving for simplicity and depth, and specifically discusses cost management and labor cost management related to labor and wages, making the textbook more applicable. This book is a job training textbook for railway labor and asset management cadres, and is also suitable for other economic management cadres, as well as students of labor economics majors in railway universities and colleges for reference.
Excerpt:
1. Initial Cash Flow refers to the cash flow that occurs at the beginning of the investment, generally, , including the following:
(1) Fixed Asset Investment. It includes the construction cost of buildings and structures, the purchase cost of machinery and equipment, transportation and installation fees, and insurance during transit. It may be a one-time expenditure or divided into several payments.
(2) Net Working Capital Advance. It includes the purchase cost of working assets for project startup before construction, and receivables and payables during the project construction process. Therefore, net working capital refers to the difference between the increase in working capital and the increase in working liabilities, which is generally negative, hence usually called net working capital advance.
(3) Various Opportunity Costs. In the selection of investment plans, if one investment plan is chosen, the opportunity to invest in other paths is inevitably abandoned. The potential returns from other investment opportunities are the cost of implementing the current plan, known as the opportunity cost of this investment plan. For example, if a company uses its existing land to build a project, since land is not valued in China, no actual cash flow occurs. However, if the land use right is used as an investment to invest in other units, such as establishing a Sino-foreign joint venture, it will form intangible asset investment for the enterprise. The investing enterprise can then obtain corresponding compensation—after-tax profits. Therefore, when determining project cash flow, this type of cash flow—opportunity cost of lost investment opportunities—should also be considered.
(4) Proceeds from the Disposal of Existing Fixed Assets. This mainly refers to the cash income obtained from selling existing fixed assets during asset renewal.
(5) Other Investment Expenses. These are expenses not closely related to the project construction, such as preparatory expenses and staff training fees.
2. Operating Cash Flow refers to the cash flow during the normal production and operation process throughout the life of the investment project after completion. It includes the following:
(1) Operating Cash Revenue. This refers to the cash revenue generated by the project's operation expanding the company's production capacity and increasing sales revenue.
(2) Cash Costs. This refers to the production costs and period expenses that need to be paid in cash after the project is put into operation. Since depreciation is generally included in production costs and related period expenses, and the extraction of depreciation does not involve cash receipts or payments, cash costs can be estimated using the following formula:
Cash Costs = Production Costs + Period Expenses - Depreciation
Operating Cash Flow can then be estimated using the following formula:
Operating Cash Flow = Sales Revenue - Cash Costs = Sales Revenue - (Production Costs + Period Expenses - Depreciation) = Sales Revenue - Production Costs - Period Expenses + Depreciation = Operating Profit + Depreciation
Through the above calculation, it can be seen that during the operating period, the result of the company's annual cash flow is, , partly from the monetary appreciation caused by profits and partly from the recovery of depreciation in cash form.
3. Terminal Cash Flow refers to the cash flow that occurs when the economic life of the project ends. It is generally , including the following two items:
Proceeds from the Disposal of Fixed Assets or Expenditures; Recovery of the Initially Advanced Net Working Capital.
Postscript: This book is one of the "New Series Textbooks on Railway Labor Management," aiming to help labor and wage management cadres master the basic knowledge of railway financial management. During the writing process, it strives to be simple yet profound, comprehensively and systematically introducing the basic content of current enterprise financial management, while specifically discussing cost management and labor cost management related to labor and wages in Chapters 9 and 10, making the textbook more applicable. This book is edited by Li Yi as the chief editor, with the following writing: Li Yi wrote chapters , 2, 3, 4, 5, and 6; Chen Yan wrote chapter 7; Chen Yan and Li Yi jointly wrote chapter 8; Jin Chenghuan wrote chapter 9; Li Yi and Jin Chenghuan jointly wrote chapter 10. Li Yi then conducted the final compilation, revision, and finalization, and wrote the review questions for each chapter. Due to the extensive scope of financial management theory and practice, and the continuous enrichment and updating of its content, writing a textbook on the basic knowledge of financial management suitable for labor and asset management cadres is a first attempt, and it is inevitable that there will be errors and omissions. We sincerely welcome readers to point out any shortcomings.
By the Authors
June 1999