Cash Flow Statement

Jay1981
Jay1981 Registered Posts: 36 💫 🐯 💫
Quick question.

I have an example question on this subject and there is a gain on disposal. Now, as the income statement shows this gain under 'other comprehensive income' and my cash flow reconciliation starts from 'profit from operating activities', am I right to not include it in he reconciliation at all? Obviously it appears under investing activities on the main statement, but it's confusing.
As I write this it seems obvious, but with it being half-term I can't get a definitive answer from my college tutor and it's really bugging me.

Thanks in advance,

Justin.

Comments

  • uknitty
    uknitty Registered Posts: 591
    The way to approach cash flows is to remember that there is a difference between profit and cash - and in the cash flow statement we only want to see cash movements.

    We need to remove the profit on the disposal of the asset that was recorded in the income statement, and add back in the actual cash received from the sale

    The way this adjustment is made is to deduct the profit on sale in the "operations" section ( remember we add back depreciation in the operating activities section for much the same reason - it is a non cash transaction)

    Now the profit has been removed you have to add back the actual cash amount received in the disposal, and as you quite rightly say this adjustment comes under investing activities.
  • sdv
    sdv Registered Posts: 585
    Jay1981 wrote: »
    Quick question.

    I have an example question on this subject and there is a gain on disposal. Now, as the income statement shows this gain under 'other comprehensive income' and my cash flow reconciliation starts from 'profit from operating activities', am I right to not include it in he reconciliation at all? Obviously it appears under investing activities on the main statement, but it's confusing.
    As I write this it seems obvious, but with it being half-term I can't get a definitive answer from my college tutor and it's really bugging me.

    Thanks in advance,

    Justin.

    Remember that you are doing a cash flow statement showing how much cash came into the company and how much cash went out of the company.

    Gain is not cash inflow into the company. The cash inflow into the company is the actual selling price of an asset. therefore take away the gain from the profit and ADD the sale proceeds in the cash flow statement under investing activities.

    I hope this explanation helps to clear the fog.
  • Jay1981
    Jay1981 Registered Posts: 36 💫 🐯 💫
    uknitty wrote: »
    We need to remove the profit on the disposal of the asset that was recorded in the income statement
    This is the part that is causing the confusion for me. My reconciliation statement starts with the 'profit from operations' figure on the income statement. The gain on disposal is not included until after this point, under 'other income'. So my question is - If it's not included in the profit from operations figure that starts my reconciliation then why would I then deduct it?
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Justin

    I am sure there are others here who can be more help than me, but may I check a point you made.
    there is a gain on disposal. Now, as the income statement shows this gain under 'other comprehensive income'
    I am reasonably confident that IAS 7 makes it clear that a gain on disposal (or a loss for that matter) is charged to the operation and forms part of the profit. There are exceptions, but typical gains such as an asset (such as plant and machinery) sold for a value above its carrying value is not treated as other comprehensive income.
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Justin

    You may find this article by Steve Collings helpful.
    http://opentuition.com/acca/f7/ias-7-statement-of-cash-flows/
    Look in particularat figure 2

    Figure 2

    Profit from operations $X

    Adjustments for:

    Depreciation $X

    Amortisation $X

    Gain on disposal of PPE ($X)

    Operating cash flows before movements in working capital $X
    Sandy
    [email protected]
    www.sandyhood.com
  • Jay1981
    Jay1981 Registered Posts: 36 💫 🐯 💫
    SandyHood wrote: »
    Justin

    I am sure there are others here who can be more help than me, but may I check a point you made.

    I am reasonably confident that IAS 7 makes it clear that a gain on disposal (or a loss for that matter) is charged to the operation and forms part of the profit. There are exceptions, but typical gains such as an asset (such as plant and machinery) sold for a value above its carrying value is not treated as other comprehensive income.
    That's why it was so confusing, I think I'm going to put it down to a badly written question from a few years ago as none of the other example questions I have set it out in this way.

    Thank you for your reply.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Justin

    You deserve praise for testing your understanding by using old questions, but remember that standards change and unless you are looking at an updated question you may well be looking at a perfectly good question when it was in an exam, but one which is now unsuitable without suitable updates.

    Even so, I do not recall the accounting standards ever treating a profit (or gain) on disposal as non-operating profit.

    A gain is merely a reimbursement of some depreciation. If you sell a piece of equipment that cost £25,000 for £7,000 but have a carrying value of £5,000 you have effectively over depreciated it by £2,000 and the gain is a recognition of that.
    Sandy
    [email protected]
    www.sandyhood.com
  • Steve Collings
    Steve Collings Registered Posts: 997
    Hi,

    Yes I agree entirely with Sandy Hood. You would normally deduct the gain, or add back a loss, onto operating profit. The reason you do this is as follows:

    Gain:
    A gain will essentially reduce the overall expenses in the income statement, therefore it will increase operating profit. Because the 'gain' is simply a paper transaction (the difference between the sales proceeds and net book value of the asset sold) it is deducted from operating profit to bring the operating profit back down to what it would have been had no gain been recognised in the income statement.

    Loss:
    If you have a loss on disposal, in other words sales proceeds are LESS than net book value of a sold asset, then you must add back this onto operating profit. This is a bit like you do when you add back depreciation onto the operating profit because the loss has increased expenses, thus reducing operating profit, and the loss on disposal is only a 'paper' loss, not a cash loss.

    In the statement of cash flows, as has already been previously mentioned, it is only the cash proceeds that go into it in investing activities.

    All the best

    Steve
  • Steve Collings
    Steve Collings Registered Posts: 997
    Sorry, I also forgot to mention (for the purposes of FNST) - 'other comprehensive income' would only ever really show gains on property revaluations. The idea of the 'other comprehensive income' section is to show those amounts that have been taken directly to equity. You would never, ever, ever take gains on disposal of property, plant and equipment to other comprehensive income!

    Kind regards
    Steve
Privacy Policy