In the Schweser notes it says that non cash charges are one element that need to be added back to NI to arrive at FCFF. I understand depreciation and amortization, but I don’t understand why the loss on a sale of a long term asset is treated as a non cash charge and not treated as a cash inflow. Later on it says “Note that if long-term assets were sold during the year, and gain or loss on the sales is handled as a non-cash item as previously discussed.” I know that this a huge part of the topic, but I don’t understand what they are talking about.
The loss needs to be added back because it is the difference between the proceeds and the basis. Consequently, the loss is reflected in the “Net income” figure, but there are no cash proceeds on the loss number. The proceeds are a cash inflow, but the gain or loss calculation that is used to derive NI is a noncash number.
It also defines FCInv as “capital expenditures-proceeds of long-term assets” and says that “fixed capital investment is a net amount.”
Thanks “goes to eleven”, you explained that pretty well. If I had read that before I wouldn’t have posted my last post.