Hi all: Could anyone help to resolve my CFI problem. Net Income: 45 purchase machine 20 Depreciation: 75 profits on sales of building 20 cash received from sales of company building 40 tax paid 25 interest paid 5 dividend paid 10 sales of preference share 35 repurchase stock 30 bond issue 50 debt retired through issue stock 45 borrowing paid off 15 From the answer,: it only take: Cash from sale of building – purchase of machinery = 40 – 20 = 20. But I wonder why it don’t take depreciation and profit on sales of building into consideration???
depreciation is a non-cash expense the amount you received for the building is an investing cash flow, the gain is not in fact, the gain is double-counted in both net income and the price you sold the building for so you will subtract it from net income if you were computing CFO
thanks for supersharpshooter for quick reply I wished to further clarify to calculate CFI: 1) ignore Gain/Loss in income statement 2) ignore depreciation(IS) and accum depreciation(BS) what is the quick way to calc CFI???
using direct method: opcfkam Wrote: ------------------------------------------------------- > Net Income: > 45 no cash flow > purchase machine > 20 CFI outflow of 20 > Depreciation: > 75 no cash flow > profits on sales of building > 20 no cash flow > cash received from sales of company building 40 CFI inflow of 40 > tax paid > 25 CFO outflow > interest paid > 5 CFO outflow > dividend paid > 10 CFF outflow > sales of preference share > 35 CFF inflow > repurchase stock > 30 CFF outflow > bond issue > 50 CFF inflow > debt retired through issue stock > 45 CFF inflow of 45 + CFF outflow of 45 = 0 > borrowing paid off > 15 CFF outflow quick way to calculate CFI = 40 - 20 = 20
Because dep’n is non cash expense but it actually reduces net income to correctly calculate CFO you need to add it back not just ignore!
using the indirect method, you need to add back depreciation to net income. using the direct method, depreciation has no cash flow effect.