Problem

(Supplement B) Computing and Reporting Cash Flow Effectsof Sale of Plant and EquipmentDuri...

(Supplement B) Computing and Reporting Cash Flow Effectsof Sale of Plant and Equipment

During two recent years Perez Construction, Inc., disposed of the following plant and equipment:

 

Year 1

Year 2

Plant and equipment (at cost)

$75,000

$13,500

Accumulated depreciation on equipment disposed of

40,385

3,773

Cash received

17,864

12,163

Gain (loss) on sale

(16,751)

2,436

Required:

1 . Determine the cash flow from the sale of property for each year that would be reported in the investing activities section of the cash flow statement.

2. Perez uses the indirect method for the operating activities section of the cash now statement. What amounts related to the sales would be added or subtracted in the computation of Net Cash Flows from Operating Activities for each year?

Step-by-Step Solution

Solution 1

Cash flow Statement:

It is a summary statement which shows the actual or expected inflows and outflows of cash in a firm for an accounting period.

It shows how the changes occurring in the balance sheet accounts affect the cash and cash equivalents.

1.

Calculate cash flow from sale of equipment that would be reported in investing activity section of cash flows statement as below:

Firstly, compute cash received from sale of equipment.

Picture 6

Thus, cash received from sale of equipment for year 1 is $17,864 and for year 2 is $12,163.

Now, report the cash received from sale of equipment in cash flow statement.

Picture 7

Therefore, cash flow from sale of equipment to be reported in cash flow statement under investing activities for year 1 is and for year 2 is .

2.

Classification of Cash Flows:

Operating Activities:

It includes the flow of cash from the company’s core operations or business activities. It is the first section of the cash flow statement. Cash from operating activities excludes non- cash items, dividend, and capital expenditure. Operating cash flow is a more accurate measure to know the cash generated by a company.

The operation activities in the cash flow statement reconciles cash flows and net income by adding back noncash expenses and cash generated by changes in working capital. Increase in current assets and decrease in current liabilities are generally deducted from the net income.

In this case, operating activities relates to the daily process undertaken by the company to generate income. Operating activities involves core activities if the business such as distributing, manufacturing, selling a product or service and marketing.

Adjustments for operating activities for gains and losses on sale of long-term Assets under indirect method:

Under indirect method, any gain from sale of an asset is subtracted from the net profit and if there is any loss is added to the net income.

Compute the cash flow from operating activity under indirect method:

For year 1:

Picture 1

Therefore, the net income would be increased by $16,751 due to loss on sale.

For year 2:

Picture 4

Therefore, the net income would be decreased by $2,436 due to gain on sale.

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