Investing cash flows
CFI is calculated by examining the change in the gross asset account that results from investing activities. Typically, this change results from purchases or sale of equipment (long term assets). To determine the cash inflow from the sale of equipment, we need to use the expression shown below.
Cash from sale of equipment = historical cost of equipment sold – Accumulated depreciation on equipment sold + Gain on sale of equipment
Historical cost of equipment sold = Beginning balance + equipment purchased – ending equipment
Accumulated depreciation = Beginning balance accumulated depreciation + depreciation expense
The balance sheet extract for Jackal Labs Ltd shows the machinery and accumulated depreciation balances for the years 2011 and 2012.
|Machinery (Gross)||$80 million||$91 million|
|Accumulated depreciation||$25 million||$31 million|
Further information provided is as follows:
Gain on sale of machinery $1.5 million
Depreciation expense for 2012 $7 million
Capital expenditure on machinery $14 million
What is the cash received from sale of equipment?
Cash from sale of machinery = historical cost of equipment sold – accumulated depreciation on equipment sold + gain on sale of equipment
We know the gain is $1.5 million. Calculate the other components in the equation:
Historical cost of equipment sold = beginning balance + equipment purchased – ending balance of equipment = 80 + 14 – 91 = $3 million
Accumulated depreciation on equipment sold = beginning value of depreciation + depreciation expense – ending value of depreciation = 25 + 7– 31 = $1 million
Cash from sale of machinery = 3 – 1 + 1.5 = 3.5
Financing cash flows
Cash flow from financing activities refers to cash flows between the firm and the suppliers of capital. Suppliers of capital include creditors, bondholders and shareholders. Similar to investing activities, the presentation of cash flows from financing activities is also identical under both methods. The figure below summarizes the calculation of net cash flows from creditors, bondholders and shareholders.
It can be calculated using the following formulae:
(1) CFF = Net cash flow from creditors + Net cash flow from shareholders
(2) Net cash flow from creditors = New borrowings – Principal repaid
(3) Net cash flow from shareholders = New equity issued – Shares repurchased – Cash dividends
The following information is available about company ABC for 2001.
New borrowings $10 million
Principal repaid $5 million
New equity issued $5 million
Shares repurchased –
Dividends paid $2 million
Net cash flow from creditors = New borrowings – Principal repaid = 10 – 5 = $5 million
Net cash flow from shareholders = New equity issued – Shares repurchased – Cash dividends = 5 – 0 -2 = $3 million
CFF = Net cash flow from creditors + Net cash flow from shareholders = 5 + 3 = $8 million
Instructor’s note: The probability of getting tested on this topic on the exam is low.
The operating cash flow from indirect method can be converted to direct by using the three-step process: