In the notes, it says "Investing cash flows are calculated by examing the change in the gross asset accounts that result from investing activities, such as property, plant, and equipment, intangible assets, and investment securities. _ Related accumulated depreciation or amortization accounts are ignored since they do not represent cash expenses. _
However, when I looked at the book, it writes "to determine the cash inflow from the sale of equipment, we analyze the equipment _ and accumulated depreciation accounts _ as well as the gain on the sale of equipment.
Aren’t they controdictary? Whether should I take depreciation into consideration when calculating cash flow from investment activity? Please help
No you shouldn’t. Net Income depreciation adjustments as non-cash transactions are calculated only using Indirect CF method to exctract EBITDA . Both method (IM and DM) differs only in CF from operating activities.
The notes are correct. When calculating CFI you don’t take into account depreciation because that has already been taken care of in the CFO calculation. However, if the CFI calculation includes a sale of asset, then accumalted depreciation is deducted from historic value of the asset ie value at which the asset was purchased and recorded in books.
We include acc dep in sale of asset calculation because we want to find the book value of the asset and compare it with the sale price of the asset to assess if a gain or loss be recorded.
Hope this helped.
The cash inflow from the sale of the equipment is the price received for it and the associated taxes paid due the gain (if any) of the equipment.
The gain is calculated as the selling price - (historical cost - accumulated depreciation) = selling price - (book value). This gain is recorded on the income statement.
thanks for your explanation! I’m totally clear now