I have a doubt with this question: If Quick Steel Company sold equipment for $200,000 for a gain of $50,000, the net cash flow from operations would be: A) a decrease in cash flow from operations of $50,000. B) a decrease in cash flow from financing of $150,000. C) an increase in cash flow from operations of $50,000. D) an increase in cash flow from financing of $150,000 What would you choose?
A – Decrease in Cash of 50000 Sold Equipment for 200000 would figure as a cash inflow on the CFI section. CP
Agree with A. You have to take the gain out of CFO to avoid double counting it.
definetly A, double counting
Yeah the answer is A . Is your answer based on indirect calculation, because otherwise it has got nothing to do with cash flow from operations. Because i would rather say the question is wrong than assuming that its indirect adjustment. Am i missing something??
this question is probably from schweser… don’t worry so much about the underlying assumption or whatever they assumed to make the question work, just work within what’s given from the question…the other 3 choices are wrong regardless of which method you use, at least A is correct when you use indirect, so just go with it
i agree with reema, A is correct under indirect method assumption.
yes, it is a Schweiser question.
What would the answer be under the direct method? zero? Dreary
When can direct and indirect methods yield differing CFOs? I thought they were always the same.
Yes, but what is the effect of the event that happened? I…e, selling equipment for $200,000 for a gain of $50,000? Zero impact on operations cash flow under the direct method, right? Dreary
no that is not true. The Gain on Sale of equipment would figure in the Other Cash Expenses section. In the Direct method my sections are 1. Cash Received from Customers = Sales, AR 2. Cash Paid to Suppliers = COGS, Inv, AP 3. Other Cash Expenses = SGA, … Gain on Sale (Deduct), Loss on Sale (Add) . . . This should ensure that both Direct and Indirect methods are identical. Look at the example in Stalla Study guide (if you have that) which shows this. CP
Dreary, you are right, there should be zero impact of selling equipment on CFO under the direct method. That cash flow should come up in CFI calculations.
Please see my post above. That is incorrect.
cpk123, you are right that in Stalla they deduct the gain, but I don’t think this is always true. What happened in the example you cited is that from the income statement, there was an item “Other Income = $1125”, which included a gain of $1000 from selling equipment. This is additional income as far as the Income statement is concerned. When they started calculating operating cashflow using the direct method, they had to add this “other income” to sales to arrive at total cash collections, but they had to take out the gain from it. What would happen if there was no “Other Income” involved? Would they need to subtract the gain? I don’t think so. Comments? Dreary
Read my comment in the other cash flow thread about not trying to memorize like robots and trying to understand what actually is going on. CFO is cash from your normal operations. selling goods or providing services, and the cost of doing that. CFI includes activity related to purchases and disposition of assets. In this section you put the total disbursements/proceeds related to this. So if you sell PPE and get in $1000 you show: “Proceeds from sale of PPE $1000” You don’t put in an asterisk and say “$900 was my book value and $100 was profit”, or “My book value was $1200 and I lost $200”. You just put in the proceeds. Going back to starting from Net income , you have to back out gains and losses, since they (netted against book value of the assets) are the amount you need to show in CFI.
Super I, we are not talking about CFI.
yeah, I second the statement from Dreary. Should gain/loss on sale of an asset make its way into CFO using the direct method? There is an example in Stalla where the Gain has been deducted There was an Other Income “entry” on the Income statement of 1125 and a gain on Sale of equipment of 1000 The Other Cash Expenses section on the CFO showed as : 1125 - 1000 = 125. Is this something that should be watched out for? If ever there is a CFO Direct question - and there was a gain / loss on Sale of equipment / asset - should we be subtracting / adding that item say from the SGA expense? Please clarify. Thanks and regards CP
Dreary Wrote: ------------------------------------------------------- > Super I, we are not talking about CFI. Which gets back to my point about understanding the process and not just arbitrarily memorizing rules. Do you understand where that gain/loss you backout goes? If you had to do answer questions about CFI where you were given gain/losses, could you handle it? cpk123 - Do you understand why they call it the direct method and how it differs from the indirect - and I don’t mean regurgitate a list of rules. if you understand the conceptuyal difference between the 2 approaches then you know the answer as to whether or not you have to adjust for gain/loss in the direct method.
Super I, Direct method is starting from Sales and then includes changes for AR