Is the gain from cash sale of land an operating or an investing cash flow?
What business is the company in?
Without knowing that, it’s impossible to answer the question intelligently.
Thanks for the reply:
the question does not mention the type of business but assumes subtracts the cash from land sale in CFO calculation:
"The net income for MB Company was $300k for the year ended December 31, 20X4. Additional information is as follows:
- Depreciation on fixed assets: $1,500,00
- Gain from cash sales of land: 200,00
- Increase in accounts payable: 300,00
- Dividends paid on preferred stock: 400,00
Under U.S. GAAP, the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 20X4 is: " from Kaplan Schweser.
Ans: $3,000,00 + $1,500,00 − $200,00 + $300,00 = $4,600,00
Gain on the sale of land is already considered in your investing cash flows. For this reason you need to deduct it from net income in order to arrive at your CFO. If not you would be double counting the gain. Similarly, losses are added.
My point is that if the company is in the real estate business, then the profit from selling the land is operating income, and the cash flow is CFO.
If the company is in the business of manufacturing yo-yos, then the profit from selling the land is investing income, and the cash flow is CFI.
Without knowing the company’s business, you cannot answer the question intelligently.
Right but for exam purposes, if the industry is not stated, do we assume gains/losses are deducted from NI to get CFO?
Gains and losses are _ always _ removed from net income to arrive at CFO; gains and losses are, by definition, non-operating.
The question is whether the money made or lost on the sale of the land falls under operations or not. On the exam, it will be clear.
Got it …thanks
I thought gains were removed but losses were added back!..Am I wrong?