I always get confused when I see the word PROCEEDS on a cash flow question. Please correct me if I’m wrong: Proceed from the sale of equipment are ADDED TO CFI Gains from the sale of equipment are SUBTRACTED FROM NET INCOME TO COMPUTE CFO Loss on sale of equipment is ADDED TO NET INCOME TO COMPUTE CFO ???
That’s right. Cash that you pay for equip is a use under CFI, cash that you receive from sale of equip is a source under CFI. With a salem the difference between the net book value of the equip and the proceeds is either a gain or loss that is included in net income. Because we only want to show the gross proceeds in one place (CFI) we back out the component (gain/loss) that is in net income (indirect method) so that we don’t include any part of the proceds in CFO.
If you are computing CFO (using indirect method) Then you’d have to a) subtract gains from NI due to sale of assets, b) add losses to NI due to sale of assets The reason you do this is because think about it, NI already incorporates gains/losses, and gains and losses are added or subtracted in CFI so that you can arrive at the NI. But when you are computing CFO, and you start with NI, you want to make sure that whatever happened in CFI that contributed to NI effect is REVERSED. hope it makes sense, i could be clearer, but this is intuitive not easy to explain.
Proceed from the sale of equipment are ADDED TO CFI Gains from the sale of equipment are SUBTRACTED FROM NET INCOME TO COMPUTE CFO Loss on sale of equipment is ADDED TO NET INCOME TO COMPUTE CFO THAT IS CORRECT, thanks for bringing it up. You want to avoid double counting.