CFI

I/S Sales 34200 COGS (28800) Dep (2400) Int expense (600) Gain on sale of equipment 240 Taxes (1080) Additional info: increase in Acc Rec 1200 Decrease in Inventory 1440 Increase in Acc pay 480 Increase in PPE (cost) 480 Incrase in bank loans 1320 Increase in common stock 720 Divs paid 240 the equipment was sold for 720 and cost 1920 with accumulated depreciation of 1440. The cash flow from investing under U.S GAAP is: -1680 -2400 +240 -1200 Can someone please explain the answer. Thanks

+240 Increase in PPE is a decrease of 480. Equipment sold is increase of 720. Gain on the sale should be taken out of CFO, although that is not part of the question. Increase in bank loans, common stock, and dividends are all CFF. All the rest is CFO.

Thanks for that, however couple of Q’s: 1) Gain on sale should only be taken out if you are calculating CFO using the indirect method(from NI) correct? 2) So CFI in these type of q’s will always increase by $ sold for - BV of asset?

  1. Correct. 2) No. It is the sale price that is the cash flow. Forget the book value. That is an accounting measure. The only relevant number is the actual cash exchanged.

Is it 240? CFI will only include the actual difference between book value and the value of the sale. Any gain/loss from book value is a CFO adjustment

mcf Wrote: ------------------------------------------------------- > Is it 240? > > CFI will only include the actual difference > between book value and the value of the sale. Any > gain/loss from book value is a CFO adjustment Wrong. CFI will include the full sale price. Book value has nothing to do with it.

720 - 480 they are just throwing a bunch of facts to make you stumble. CFI: biggest item on there is typically CAPXso if you see “CFI” think PP+E

Is the answer 1680???

Of course book value factors into it. How else would you have a gain/loss on the sale unless you had a book value position that you were basing it from.

What is the answer???

mcf Wrote: ------------------------------------------------------- > Of course book value factors into it. How else > would you have a gain/loss on the sale unless you > had a book value position that you were basing it > from. It factors into the income statement as a gain. It has nothing to do with cash flow. I sell property for $1000 means I have a positive CF of $1000. It makes no difference to CFI if the BV is $1 or $999. The cash flow is the same either way. I suggest you read the section of st. of cash flows again.

Well i posted this Q earlier and the answer I have is: increase in ppe --------------------480 cost of disposed equipment-----1920 --------------------------------------------- Additions to ppe = 2,400 Since additions to PPE were 2400 and 720 was received from disposals, the net outflow on investing is 2400 less 720 = 1680. Kris can you please explain… I’m pretty sure you’re right.

Here is how I got -1680 Ending PPE= Beg PPE + Cap Investments - Eqip sold The equipment sold was at historical cost of 1920 and Ending PPE - Beg PPE is 480 so the capital expenditure has to be 1920 +480 = 2400. So outflow is 2400 Inflow is 720 So CFI= -1680 not 420 !!!

Genius, thanks a lot… It’s funny, i posted this same Q a while ago and a few different people assured me the answer was wrong. http://www.analystforum.com/phorums/read.php?11,753165,753529#msg-753529 Just got a Q: I just don’t quite understand one part Why is the outflow 2400? Isn’t CFI just change in PPE? Why do you take the capital exp as the outflow for CFI? Anyway thanks

Because capital expenditure is the amount of money that you spend to buy the new PPE. So it is an outflow of money from the firm !!!