Cash flow Statements

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Can someone please help?

When working out you net cash flow from operating activities why is a profit on a disposal of a fixed asset put down as a credit amount??? (so you have to take the amount away from the operating profit ?

I know how to work the cash flow out but just cant get my head round why ?

Its probably a really silly question!! - sorry

Kind Regards
Sarah

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Cash flow Statements

    Hi, I think it is because depreciation is not actually money it is a book entry to show how much the asset is worth at the end of each year as it slowly losses its value. The money side of things is the profit or loss you make on the asset. I don't know if that makes sense.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Cash flow Statements

    To add on,
    if profit on sale is shown in the PL account in that year (NORMALLY the case ) then you have to subtract it from Operating Profit when calculating Cash Flow.
    I know how to calculate but still dont understand why ?
    Check December 2003 question paper.
    Can somebody explain this, please

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Cash flow Statements

    It seems to me that profit or loss on disposal of Fixed Assests is a NON OPERATING ACTIVITY and hence its treatment.
    The idea is to remove it from the Cash Flow.
    Please note
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Cash flow Statements

    Further to the above, I think of it like this...

    The Cash Flow Statement will include the full amount received from the sale of a fixed asset (i.e. it includes the profit or loss on the sale).

    If you leave in the profit (or loss) on sale figure from the Profit & Loss account it would be counted twice.

    Therefore you need to take the profit out before you start filling in the Cash Flow Statement. This is why it is removed in the reconciliation between operating profit and net cash flow from operating activities.

    Hope this helps and I haven't confused you more.

    Regards,
    Seren.

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