Hey Guys, I’m struggling to understand why the effect on cash flow would be NEGATIVE on the satement of cash flows, if their was a GAIN on the sale of equipment formally used in the business?
Are you talking about subtracting the gain on sale of equipment from CFO using the indirect method? That is because it’s an investing activity…
forumreader – that is not the reason. When you book a gain on sale of an equipment – the gain portion is already included in your net income. Now because you are starting out with the Net Income – you need to remove the “effect of the gain” – so you subtract that out. Now there are two parts --> Gain on Sale – removed on Indirect method from CFO calculation. Actual Sales Proceeds – added as a Cash Inflow in the CFI calculation. For Loss on Sale of an equipment --> this has been REMOVED from NI during calculation of Net Income. So you ADD it back while calculating the CFO using the Indirect method. Here too (in the Loss case) Actual Sales Proceeds – added as a Cash Inflow in the CFI calculation. CP
This is the question: A corporation reported the following information for the past year: Net Income $200,000 Depreciation Expense 30,000 Gain on Sale of Truck 5,000 Proceeds from Sale of Truck 8,000 Decrease in Accounts Receivable 10,000 Assuming these are the only facts, what amount will the corporation report as the Cash Provided by Operating Activities on the cash flow statement? Answer is 235 (in which they deduct 5 for the gain on sale) If i understand correctly the proceeds of truck sale are added to CFI?
cpk123, could you please explain to me how it’s not the reason? I was referring to the sale of equipment (and thus the gain) being an investing activity. Is that not what you also said, but in more (and perhaps better) words?
So what I was trying to say was --> there are two parts to the Sale. 1. the gain on Sale 2. the Sale proceeds itself. It is important to note the distinction in the treatment of these two parts. Gain on Sale is REMOVED for CFO calculation using the Indirect method. Reason it is removed is because you start with Net Income in the indirect method, and since it is already a part of the Net Income, if you do not remove it consciously, you have double counted for the Gain on the Sale. Sales Proceeds is INCLUDED as CFI. That is all I was trying to say. CP
Reineir, remember that is is using the indirect method, so you start with net income and add back non-cash and non-operating items. Start with the 200,000 of net income Add back the 30,000 of depreciation, because that’s a non-cash expense Subtract the gain on sale (5000) because that is a non-operating item (it is part of investing for a company) Add the decrease in accounts receivable of 10,000 because it is decrease in a current operating asset So 200 + 30 - 5 + 10 = 235
A corporation reported the following information for the past year: Net Income $200,000 Depreciation Expense 30,000 Gain on Sale of Truck 5,000 Proceeds from Sale of Truck 8,000 Decrease in Accounts Receivable 10,000 Renier NI = 200 Depr = 30 Gain on Sale = (5) Decrease in AR = +10 So CFO = 230-5+10 = 235 CFI = +8 CP
Thanks CP, I will try to remember to think of it as two separate parts, which should keep things clearer even in my mind.
For CFO: Net income = $200,000 Depreciation Expense = +$30,000 (depreciation expense is a non-cash item; it was taken out to calculate net income, it must be added back on to calculate CFO) Gain on Sale of Truck = -$5,000 (the gain is a non-cash item; it was added to calculate net income, it must be subtracted to calculate CFO) Decrease in Accounts Receivable = +$10,000 (a decrease in an asset, such as AR, is a source of cash) CFO = $235,000 Proceeds from Sale of Truck. First, this item is not included in net income; therefore, you do not need to do anything to calculate CFO (purchases and sales of assets do not flow in the income statement; gains and losses on sales of assets do, however; that’s why we had to do something about the Gain on Sale of Truck). Second, this item is a cash item, so it needs to be reflected somewhere; not in CFO, but in CFI (purchases and sales of assets are usually reported in CFI).