Cash Charge
Categories: Banking
You may have heard of a company shutting down a business unit and laying off employees while taking a “one-time” cash charge to their earnings. This is generally accompanied by a large cash outflow to cover severance payments to employees, and perhaps funding early retirement packages. Hopefully, this one-time expense is made up for by cost savings through reduced salary expenses.
A cash charge appears as an extraordinary expense on the company’s income statement and reduces net income, which should also result in lower taxes. However, the outflow of cash to pay for all the severance packages, etc. will reduce the amount of cash on hand on the company’s balance sheet.
Example.
General Chaos Inc. decides to automate its call center, and will replace 400 employees with a $10,000 computer. Since the workers are unionized, GC will have to pay one year’s salary to each employee...so they take a one-time cash charge of $20 million. There will be a large outflow of cash to pay the salaries, but going forward they will hopefully save $20 million in salaries per year by relying on the computer. (Now no one will ever be able to reach a human being.)
A cash charge is very different from a non-cash charge. Non-cash charges refer to writing down the value of intangible assets, such as patents or stock-based compensation. There is no cash outflow, because the assets are intangible, but there is still an extraordinary expense charged on the company’s income statement that reduces net income. However, there will be no effect on the cash amount on the balance sheet.
The gaming company We Are Virtually Successful Inc. thought their patent for virtual reality games was worth $100 million. When that didn’t pan out in the marketplace, they had to write down the value of the patent to $10 million, taking a non-cash charge of $90 million on their income statement earnings. However, the cash amount listed on the balance sheet will remain unchanged, because there was no “real” outflow of cash.
Be on the lookout for companies that take “one-time” cash charges frequently. These charges are usually not included on a “pro-forma” earnings statement (earnings that don’t include certain costs), so some companies like to take a lot of one-time charges to make their financial health look better than it is.
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Finance: How Do Credit Card Companies Wo...116 Views
finance a la shmoop. how do credit card companies work? you could write a
book on this but don't. it'll hurt instead think about a credit card [man carries huge book and grimaces]
company is kind of twisted moneylender who really makes money in two ways.
well first they make money from the people who take your credit cards like
when you use your credit card to lovingly pay shmoop 20 bucks a month for our
awesome content. thank you very much. that $20 charge carries about a 1% hit. from
the credit card company that is the hard-working elves here at shmoop only
keep about nineteen dollars and 80 cents from that twenty you just paid. credit [equation]
card companies need to pay for their jets right? well that one transaction was
just 20 cents but there are gujilion's of them so the dough adds up to billions
and billions really fast. unless do you think the job of being a credit card
company is easy, note that every few thousand transactions is done by some
bad actor like no different kind of bad actor. you know meaning of theif someone
behaving badly they've stolen your card and if race to Best Buy [man runs out of store carrying TV]
hoping to abscond with ten flat screens to sell on the street corner and make a
fast buck. while the credit card company is generally responsible for those
frauds against mankind and have to hunt down the bad guys .so that's one way
they make money. the other way credit card companies get paid is that they get
money from consumers who use them either directly or indirectly directly. means
something like an annual fee. and then there are charges well you know that is
if you don't pay off your credit card bill each month you carry what is called [credit card rates listed]
a balance. and on those amounts you pay huge interest. like for many buyers on
credit the fee is 15 to 20 percent per year these days and sometimes more. so if
you bought a thousand dollar television set with your 20% credit card and didn't
pay it off for three years you'd have paid $200 a year in interest for three
years or $600. do you think Visa Mastercard or Amex pay 20% interest for
the money they borrow to lend to you? hardly they pay very very low interest
rates like just a few percent in there so on the [visa employees pictured]
20% they charge you an interest to punish you for not paying off your
credit card their cost is more like 2% I either making like an 18% spread or
profit margin on that money. the 600 bucks you paid for renting the grand for
3 years from the kindly loving people at visa
Oh made visa over 500 bucks on that money nice. work if you can get it and [equation]
you know a really nice jet.