Calculation CFI

[Sebastiaan]

Hi all,
For calculation CFI (example 1 in Schwezer):
In P&L: Gain from sale of land : 10,000
Balance sheet: Gross PPE from 60,000 to 85,000 and Land from 40,000 to 35,000
In my opinion: CFI = 5000-25000 = -20,000
Answer = -10,000 ( include gain sale of land ), why?
Another example (2) in Schwezer:
For calculation CFI
Purchase machinery: 20
Sale company building: 40
Profit sale building: 20
In my opinion: CFI =40-20= 20, and that is the correct answer
So why in example 1 CFI is include the gain and not in example 2?

 

[Oscar]

The Investing Cash Flow does not include any gains or losses from divested assets like the sale of land. What has to be included is the received cash flows from the transaction. it is very important here to distinguish between gains and losses which are merely accounting figures and the real cash flow from a transaction.

CFI from investments in PPE: 60 - 85 = -25
CFI from sale of land: 10+ 5 =15
CFI Total: -10
Note: As you have gross PPE no further information about depreciation is needed - if you would have received nett PPE figures you would need to adjust for depreciation. The cash flow from the sale of land is derived from the following relationship: Gain/Loss = Selling Price (=cash flow) - Book Value; here 10 = P - 5.
Note also that in your second example you have already been provided with the relevant cash figures (-20 and +40).
Best,
Oscar

 

[Salman]

Lest break the problem 1 down into chunks.
One part says Gain on sales of Land. Remember Land is not depreciated. So, you dont have to worry about depreciation here. Gain means the excess amount you got over the cost (in the context of selling Plant, machinery, equipment and land). So, when you sold the kland, you got 1) the cost and 2) the gain.
When you see the balance sheet extract, they information about land shows a reduction of 5,000 (Land from 40,000 to 35,000). that means the land you sold had a cost of 5,000. But you got a gain of 10,000 when you sold it. So the total sales proceeds will be 15,000 (inflows).
Now for the PPE part, you purchased PPE worth 25,000 (PPE from 60,000 to 85,000). These are outflows.
So, from an investing perspective, both are investing activities. CFI = Inflows from investing activities - outflows from investing activities.
CFI = 15,000 - 25,000
CFI = -10,000
Moving on to Problem 2
The only thing different in this problem is the part “Sale company building: 40”
in problem one we had to calculate sales proceeds while in this problem its already mentioned.
The rest is math.
You got the right answer for problem 2 for the wring reasons. I’d suggest breaking sale transactions into the cost and profit/loss part whenever you are dealing with questions like these.
Regards