Cash Flow

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Income statement:
- gains from land sold is $10,000
Balance sheet:
- land - beginning of the year $40,000
- land -ending of the year $35,000
It needs to make Cash Flow using information above (indirect method)
The answer is - cash flow from sale of land is $15,000
Can anybody give me some example how this could happen? I would like to understand this intuitively, instead of just memorizing a formula.
 
Book value of asset sold = beginning book value – ending book value
= $40,000 – $35,000 = $5,000
Profit = selling price – book value (of asset sold)
$10,000 = selling price – $5,000
Selling price = $15,000
 
..or simply amount for asset sold increased for depreciation amount of 5.000 (Difference between beginning and ending asset balance) . Remeber that IM requires adjusting for non-cash balances.
 
Flashback wrote:
..or simply amount for asset sold increased for depreciation amount of 5.000 (Difference between beginning and ending asset balance) . Remeber that IM requires adjusting for non-cash balances.
Click to expand...
Be careful with that procedure. Land does not depreciate. In this case the difference between beggining and ending value of land means the 5,000 book value worth of land sold. That is why you gain 10k when you sell at 15k.
Cheers
 
Harrogath wrote:
Flashback wrote:
..or simply amount for asset sold increased for depreciation amount of 5.000 (Difference between beginning and ending asset balance) . Remeber that IM requires adjusting for non-cash balances.
Click to expand...
Be careful with that procedure. Land does not depreciate. In this case the difference between beggining and ending value of land means the 5,000 book value worth of land sold. That is why you gain 10k when you sell at 15k.
Cheers
Click to expand...
You are right. I did’t read carefully. Thought it was a buliding. Anyway, land can be impaired or revalued (upon IFRS), given that question I would conclude so and proceed as in ordinary asset depreciation case.
 
Flashback wrote:
Harrogath wrote:
Flashback wrote:..or simply amount for asset sold increased for depreciation amount of 5.000 (Difference between beginning and ending asset balance) . Remeber that IM requires adjusting for non-cash balances.
Click to expand...
Be careful with that procedure. Land does not depreciate. In this case the difference between beggining and ending value of land means the 5,000 book value worth of land sold. That is why you gain 10k when you sell at 15k.
Cheers
Click to expand...
You are right. I did’t read carefully. Thought it was a buliding. Anyway, land can be impaired or revalued (upon IFRS), given that question I would conclude so and proceed as in ordinary asset depreciation case.
Click to expand...
That doesn’t work unless they also give you the depreciation expense for the year.
You’re needlessly complicating this (very simple) problem.
 
I wonder what is the reason for BV decrease from 40K to 35K during one year if it’s not
depreciation (an impairment) expense? Trial balance of asset book value is 35K not 5K in this
example.
 
Dear S2000magician
Sorry, I cannot understand your approach. Nevermind.
 
Flashback wrote:
Dear S2000magician
Sorry, I cannot understand your approach. Nevermind.
Click to expand...
Is much more simple than you think, really.
Assume that at the beginning of the year you have 8 hectares of land with a book value of 40,000, so each hectare is 5,000 worth. If you sold one hectare and you won 10,000 in the transaction, what was the price (cash inflow) you received? 15,000. At the end of the year what will be your land book value? 35,000.
The problem posted stated it in a different way, it didn’t give you the number of hectares nor the book value of each hectare, so you assume those 40,000 - 35,000 = 5000 difference in book value was due the sale of a portion of the land asset. If you gained 10,000 and it costed 5,000, hence you sold it for 15,000. Simple.
Hope this helps.
 
There are two categories of situations that reduce the (net) book value of long-term assets:
  • Decreases in the value of long-term assets that are retained: depreciation, amortization, write-downs, and so on. (Note: write-ups would be included here as well.)
  • Sale of long-term assets.
Here, there is no depreciation, no amortization, no write-down, so the change from $40,000 to $35,000 is solely the result of selling the chunk of land: the book value of that chunk of land was $5,000.
 
S2000magician wrote:
There are two categories of situations that reduce the (net) book value of long-term assets:
  • Decreases in the value of long-term assets that are retained: depreciation, amortization, write-downs, and so on. (Note: write-ups would be included here as well.)
  • Sale of long-term assets.
Here, there is no depreciation, no amortization, no write-down, so the change from $40,000 to $35,000 is solely the result of selling the chunk of land: the book value of that chunk of land was $5,000.
Click to expand...
It makes sense. When I talk about land in BS , I assume land as Fixed assets BS position (LTA) rather than land as stock-inventory (STA, it’s a rare situation, IMO). Thus I talked about depreciation or an impairment since land cannot be depreciated in this case. Hope in CFA exam question of these type will be clearly presented. I prefer CFA regular Mock exercices rather than 3rd party material because I have not found many incomplete and doubtful questions there. In 3rd party materials seems it’s a common way of questionary.
Appreciate your help, s2000 & Harrogath.:)
 
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