Cash Flow from Operating Activities

CFA Level I
#1

Hello,

Why is gain on the sale of equipment treated as a negative cash flow?

Thanks in advance.

Given the following information for a company, its CFO is closest to:

Net income $1,000 Decrease in interest payable $85 Gain on sale of equipment $45 Increase in accounts payable $90 Decrease in inventory $35 Increase in prepaid assets $105 Depreciation $85 Increase in taxes payable $125

$1,100

$1,250

$1,050

You Answered Correctly!

CFO = 1,000 – 85 – 45 + 90 + 35 – 105 + 85 +125 = $1,100

#2

Sale of equipment is not an operating activity, therefore gain must be deducted.

#3

Furthermore, the gain on the sale of equipment is not a cash flow. The price you receive for the equipment is the cash flow (from investing, not from operations).

#4

If there was a

Loss on the sale of equipment of ($45)

Would that be added back to CFO?

#5

Yes.