Net Income = 100 Depreciation = 25 Purchase of machine = $50 Sale of company trucks = $30 Sale of common stock = $45 Decrease in accounts receivable = $10 Increase in inventory = $20 Issuance of bonds = $25 Increase in accounts payable = $15 Increase in wages payable = $10 Cash flow from operating activities is: A. $125 B. $135 C. $140 D. $185 I calculated this as Net Income +Depreciation-Sale of company trucks+Decrease in accts. receivable-Increase in inventory+Increase in accounts payable+Increase in wages payable and got $110. Why shouldn’t the sale of company trucks be deducted from net income since it would have been included in net income?
Sale of Company Trucks = Sale of a capital asset – assuming this is a trucking company. So it would not be a CFO, it would be a CFI Inflow. Gain on Sales of Trucks (if any) would be a CFO Deduction component. Net Income = 100 Depreciation = 25 Purchase of machine = $50 Sale of company trucks = $30 Sale of common stock = $45 Decrease in accounts receivable = $10 Increase in inventory = $20 Issuance of bonds = $25 Increase in accounts payable = $15 Increase in wages payable = $10 100 + 25 +10 - 20 + 15 + 10 = 140 --> C would be CFO CFI = + 30 - 50 = -20 CFF = + 45 + 25 = + 70
A gain on the sale of company truck would be included in NI, you would need to deduct that. In this case it does not state that it was a gain, so you can assume it is a CFI cash flow.
Only the gains/losses from the sale of PP&E assets is included in the NI. So only the gains/losses should be adjusted in CFO. Answer is C.