Why is sale of equipment a CFI but profit on sale of equipment a CFO? Furthermore, shouldn’t the profit on sale of equipment be added not subtraced? Determine the cash flow from operations given the following table. Item Amount Cash payment of dividends $30 Sale of equipment $10 Net income $25 Purchase of land $15 Increase in accounts payable $20 Sale of preferred stock $25 Increase in deferred taxes $5 Profit on sale of equipment $15 A) $45. B) $20. C) $35. D) $15. Your answer: A was incorrect. The correct answer was C) $35. Item Amount Cash payment of dividends CFF -$30 Sale of equipment CFI +$10 Net income CFO +$25 Purchase of land CFI -$15 Increase in accounts payable CFO +$20 Sale of preferred stock CFF +$25 Increase in deferred taxes CFO +$5 Profit on sale of equipment CFO -$15 CFO = 25(NI) +20(AP) +5(Def Tax) - 15(Equip Profit) = $35
The entire proceeds from the sale of PPE is cFI. If you are calculating CFO using the indirect method, the gain/loss from the sale of PPE is included in the Net Income. You need to back it out of NI when calculating CFO . Note if you are calculating CFO using direct method, you would not need to back out the gain.
All cash related to sale of equipment is an investing cash flow. Because the gain is included in Net Income, we need to back it out to arrive at CFO. Let’s look at a transaction… Asset has BV of 150 and you sell it for 200. Dr. Cash 200 Cr. Asset (150) Cr. Gain on Sale (50) That 50 is included in Net Income, but it does not relate to operating cashflow. Using the indirect method, we start with Net Income and adjust back to deduce CFO. Because the 50 gain should relate to Investing activity, we need to subtract the 50 from Net Income to arrive at CFO. Does that help?
ah makes sense, thank you
NI + Increase in accounts payable + Increase in deferred taxes - Profit from sale of equipment = 25 + 20 + 5 -15 = 35 = Ans C - Dinesh S