Sales of Fixed Assets effect OCF

Why does a profit from the sale of a fixed asset decrease Operating CF?

It doesn’t.

It has no effect on CFO; the cash flow from the sale is CFI.

If there is a gain it is subtracted from NI to get CFO. If there is a loss on the sale, it is added back to NI to get to CFO. This is because the gain or loss is included in NI but is not a real cash transaction. The actual proceeds from the sale should be a cash inflow, to CFI.

Yes it does. The reason being is because the entire proceeds from the sale of the transaction need to be reported under CFI. CFO incorporates net income where the gain/loss of the transaction is reflected. In order to keep things balanced we must offset a gain (by a CFO cash outflow) or a loss (by a CFO cash inflow). This negates the original gain/loss in the NI (part of the CFO). The total cash amount received is a cash inflow for CFI.

It’s an adjustment to CFO (at least under the indirect method), but it doesn’t affect CFO.

Remember that in the indirect method, you start with Net Income, and then make adjustments for (1) items included in NI that are NOT cash and (2) Items on the Balance sheet that are NOT REFLECTED IN NI.

A gain from a sale of a Fixed Asset is in the first category - it’s a non-cash item that increases NI (note: a loss decreases NI). So, we deduct it (and we’d add back a loss).

It’s also (as S2000 traditionally reminds me when I use this explanation) not an operating activity.

The reason we remove gains and losses is not that they aren’t cash transactions.

The reason we remove gains and losses is that they’re not operating transactions; they’re investing transactions. The fact that they aren’t necessarily cash is coincidental; it’s not the reason they’re removed.

No, it doesn’t.

Look at the direct method for computing CFO. Everything in there (and _ only _ the things in there) affect CFO, and gains and losses on the sale of fixed assets aren’t in there.

Sigh.

With all due respect – and you know that I have the deepest respect for you and the help you provide the candidates here – I think that the shiny light’s been distracting you today.

In the indirect method we start with Net Income and make adjustments for two types of items (so far, so good): 1) items that are not cash, and 2) _ items that are not operations _. We’re heading toward CFO, so re remove anything that isn’t CF, and we remove anything that isn’t O.

A gain (or loss) from the sale of a Fixed Asset is in the second category: it’s not part of operations; it’s part of investing. It may be all cash (we sell an asset for $1,000 that has a book value of zero), part cash (we sell an asset for $1,000 that has a book value of $1,500), or no cash (we discard an asset that has a book value of $1,000); none of that matters. We remove it because it’s not operations, not because it’s not cash.