Schweser FRA Book Page 137 Challenge Problem

CFA Level I FRA
#1

Good evening,

I am a bit confused about the Schweser challenge problem on page 137 of the FRA book. For calculating the cash flow from investing activities in question D, why isn’t the “Gain on sale of old machine” from the income statement taken into consideration? Is that because we do not know for sure whether this resulted in actual cash being exchanged (so for example the buyer might have bought the new machine on credit)?

Thanks!

#2

the gain from sale of old machine would be REMOVED from CFO calculation.

CFO starts with Net Income.

and already includes effect of the Gain on Sale.

CFI - would include the Sale price of the old equipment … which also includes the Gain on Sale.

So now the Gain on Sale would be double counted.

So it is removed from the CFO - and when you include teh Sale Price in the CFI - there is no double counting any more.

#3

CP, I see and it is clear to me from your explanation. Many thans!

#4

also by the same explanation - a loss on sale would be added to calculate CFO.