ABC LTD reported the following information in the past year.


$
Net Income 100,000
Purchase of building 580,000
Proceeds from sales of existing building 600,000
Losses made from sales of existing building 120,000
Depreciation of buildings for the entire year 130,000

Compute the net cash inflow/(outflow) of investing activity.

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Quote:

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Originally Posted by soneeya1

ABC LTD reported the following information in the past year.


$
Net Income 100,000
Purchase of building 580,000
Proceeds from sales of existing building 600,000
Losses made from sales of existing building 120,000
Depreciation of buildings for the entire year 130,000

Compute the net cash inflow/(outflow) of investing activity.

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I compute in this way help if its wrong

Net income 100,000
Sales of existing building 600,000
Purchase of building (580,000)
Losses made from sales (120,000)
Depreciation fro the year 130,000 30,000

Net cas flow for investing activity 70,000

You have assumed they all go in there.

First, the net income is used ONLY in the operating section and ONLY for indirect method. The operating section is about the day-to-day operations, which is much or mostly what net income is about. So it starts with net income and makes a series of adjustments to get it back to cash and get rid of some things which don't belong.

Assets are considered what you have invested in. So activities involving assets are the investing activities. This does not include current assets, because those are basically tied up in the operating activities.

Liabilities and Equity are how you finance a company, so that is the financing activities. Again, this does not include current liabilities except dividends payable (related to stock).

So in short, think of the left side of your accounting equation as investing, and the right side as financing. But dump out the current assets and current liabilities.

Both investing and financing are DIRECT method. This means you are showing directly where cash came from and where it went to. Depreciation isn't cash. Even though depreciation is relating to your plant assets, it's not cash.

Losses are not a direct cash -- that is, any loss or gain is already included in the cash from the sale. If you sell something for $1000 and that's a $100 gain, the $100 is already in the $1000 of cash you report. If it was $100 loss instead, you didn't actually get cash from the loss, but you also did not give out any cash for the loss. It simply doesn't exist in the cash at all. Therefore a loss is not a negative cash flow.

(Do not confuse any of the above statements with the set of adjustments you make in the operating section. If you do an indirect method, that is an entirely different concept. There is an illustration of that here:
Principles of Accounting Chapter 16)

That does mean it should be


Sales of existing building 600,000
Purchase of building (580,000)

Net cash flow for investing activity 20,000

Yup it does. :-) The loss is accounted for in the sale. What you got for the sale is the cash flow, not the loss. (The loss is an adjustment in the operating section.) And depreciation and net income only belong in operating.

Quote:

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Originally Posted by morgaine300

Yup it does. :-) The loss is accounted for in the sale. What you got for the sale is the cash flow, not the loss. (The loss is an adjustment in the operating section.) And depreciation and net income only belong in operating.

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Thank you Morgaine! It was indeed a great help to make me understand :)