Hi I have doubt in Indrect Methd of Cashflow; Kalpan, Book3, Reading Assignment 27, Pg no. 120 & 117 (Steps1 -4) Which deals in an expample of Indirect Cash Flow method.
My doubt is : Cash From Sale Of Land = Decrease in Assest + Gain on Sale = $5000 + $10,000 = $15,000.
Whether $10,000 will be deducted instead of adding, please help.
The bigger the gain, the higher the positive cash flow: you add the gain.
On indirect method you will deduct gains and add losses when you sell assets.
How a gain or loss from the sale of an asset is calculated?
Gain / loss = Price sold - Carrying value of asset.
Carrying value is the book value at the time of the sale.
Carrying value = historical value - accumulated depreciation
Suppose you gained 10,000 on the sale of land. Then deduct this gain from net income when calculating Operating cash flow.
Why deduct? Because if not, you are double counting numbers on the Total Cash Flow of the company.
The amount ($) receieved from the sale is already accounted in the Investment Cash Flow. So, since Net Income accounts for the gain, then it needs to be reverted in order to avoid double accounting of the gain in the operating cash flow.
Why? You can see the sale price as the sum of:
Price of asset sold = Carrying value (Book value) +/- Gain/Loss
Hope this helps. Glad to further discuss this.