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If a NC asset is sold for 80000, this means 80000 cash has flowed into the business, so why isnt the cashflow figure just 80000, regardless of profit/loss made and depreciation?
It is! PROCEEDS OF ASSET DISPOSALS are shown as inflows within the Investing Activities section of the cash flow. The only exception at this level is where an asset is traded in against the cost of a new asset.
Profits / losses on asset disposals are shown as ( deductions ) / add backs to the Profit before Tax figure in the Operating Activities section of the Statement of Cash Flows
maybe i can better phrase my question,
say assets are sold for 75000, (they were worth 80,000 so loss of 5000)
but my question is, if there was accumulated depreciation of 15,000. then the proceeds are 60,000 and this figure is used in Investing Activites as an inflow of cash. But, as far as i can see, the business had an inflow of cash of 75000. so why take depreciation into account, I thought cashflow was about flow of cash not profit/loss ?thx for your patience!
There are two methods to making a cash flow statement:
Direct method – you take all cash receipts and cash payments, net it and you arrive at the closing balance.
Indirect method – start with the Net Profit from the I/S and make adjustments to arrive at the closing balance.In the exam – and what you are doing! is the indirect method.
So, start the cash flow with the Net Profit and add/subtract anything that is not a cash movement e.g depreciation. We then end up with the actual cash balance.
Appreciate the fact that when you sold the asset the LOSS would have been included in the Net Profit figure ie. £50,000 – this LOSS is not a cash movement! So add back.
However, the proceeds (cash received) of £75,000, is a cash movement and we add this to the cash statement.What you are doing, Soar, is adjusting the Net Profit figure to arrive at the cash balance.
So I was confusing direct and indirect methods.
Does direct and indirect methods end up with the same totals / figures on final cash flow statement?
Yes, exactly the same.
The direct method can be extremely time consuming; imagine a big company collecting all receipts and payments for the year!
The indirect method is the most popular of the two because it is much quicker.Look at a past question and see how the Net Profit is being adjusted, in the operating activities section, to arrive at the cash balance.
Remember, the cash balance cannot be manipulated, or have a different figure using a different method; it should show the actual amount of cash in the business to the penny!
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