Sign up  |  Log in

Sold asset on CFO and net income

A company purchased an asset 3 years ago for $125,000. It sold the asset in the current year for $12,000. The current year’s CFO exceeds net income by $5,000. Assuming that these are the only transactions undertaken by the company and no depreciation was charged during the year, the accumulated depreciation charged against the asset is closest to:

$108,000.
$118,000.
$17,000.

Begin your Level II studies with a FREE Schweser JumpStart Package. Available to December 2019 Level I CFA candidates only. Offer expires 1/29.

I believe the answer is $108,000.

Since CFO is greater than net income by $5,000, and no other transactions that would affect CFO have taken place (including D&A), the only option left is a +$5,000 adjustment from the loss on the sale of the asset. Since sales of assets are typically non-operating items, gains from asset sales are subtracted from NI and losses from asset sales are added when calculating CFO.

The loss of $5,000 means the asset’s carrying value at the time of sale was $17,000 ($12,000 + $5,000), where G/L from an asset sale = carrying value - sale price. Subtracting $17,000 from $125,000 is $108,000.