Use the following information to calculate cash flows from operations using the indirect method. Net Income $12,000 Depreciation Expense 1,000 Loss on sale of machinery 500 Increase in Accounts Receivable 2,000 Decrease in Accounts Payable 1,500 Increase in Income taxes payable 500 Repayment of Bonds 3,000 A) Increase in cash of $7,500. B) Increase in cash of $9,500. C) Decrease in cash of $8,500. D) Increase in cash of $10,500 Correct answer is D. My question is shouldn’t I ignore "Loss on sale of machinery 500 " as it is CFI. I had same doubts for Concept checkers in schweser— Q5 pg 128 Book FSA. In that Q also they included Gain on sale of machinery . Thanks for all responses in advance.
Under the indirect method, NI is reconciled for all non-operating activities, non-cash expenses and changes in working capital items (to obtain CFO). The loss on the sale of equipment is not an operating expense, so it needs to be added back to net income, just like a gain would need to be deducted.
Net Income $12,000 Depreciation Expense 1,000 Loss on sale of machinery 500 Increase in Accounts Receivable 2,000 Decrease in Accounts Payable 1,500 Increase in Income taxes payable 500 Repayment of Bonds 3,000 CFO=12000 + 1000 + 500 - 2000 - 1500 + 500 = 10500 (Choice D) Repayment of Bonds is a CFF item. CP
While Net Income was being calculated, loss on sale of machinery was deducted from Revenue. So, when you calculate CFO from Net Income, you need to add it back to Net Income figure since it is not an operating cash outflow.
CFI includes gross proceeds from sale of PPE, i.e. NBV plus gain or minus loss. The adjustment for the gain/loss out of the income statement allows you to include it in CFI
uhhh… ignore what njblain said above. The indirect and direct method are NOT the same. This thread has some comments on how they differ http://www.analystforum.com/phorums/read.php?11,630674,630858#msg-630858
The calculation are certainly not the same, but the final result is the same. Agree with Super I in saying that “the direct method is just that. Direct. No starting with numbers that are off and adjusting them. What did you collect in cash from customers? What did you pay vendors? etc…of that” I
njblain You don’t have the same balance sheet adjustments for the direct method. Under direct you don’t care about changes in accounts receivable or payable (or at least you don’t list them out). maybe you do get it and are just not explaining it properly, but people who read what you post will get confused if they follow what you say too closely. An exam question on CFO will give you slightly different sets of info if they want direct vs indirect, with some overlap of info as a trap if you don’t know it cold. You need to know the stuf better then just to say that the two methods both have the same end result.