University:
California State University, Northridge
Course:
ACCT 350 | Intermediate Financial Accounting I
Academic year:

2024
Views:

303

Pages:

2
Author:

katerjvcq

Calculating Cash Flows due to Investment in Fixed Assets • Net Value of Fixed Assets on the Balance Sheet o The Net Value of Fixed Assets equals Fixed Assets minus Accumulated Depreciation. o Some Balance Sheets just show the net result and some show both the value of Fixed Assets and the Accumulated Depreciation. o See pages 169 thru 171 in Riggs. • Accumulated Depreciation and Depreciation Expense are not the same o Accumulated Depreciation is an ongoing account over many accounting periods o Depreciation Expense is the amount of Accumulated Depreciation during the current accounting period.  This is the value of the CHANGE in Accumulated Depreciation over the accounting period.  Depreciation Expense is the amount that Net Value of Fixed Assets was reduced over the accounting period.  This is the value on page 98 of Riggs. It is also the value on the Income Statement and Cash Flow Statement for the accounting period. • Calculating the Investment in Fixed Asset for the Cash Flow Statement (pg 98 in Riggs). o The change in the NET value of Fixed Assets was an increase of $11,939 ($113,650 – $101,711).  To increase your investment you must USE cash. o But this increase in the NET value was understated.  It was actually higher and was reduced by some amount of Depreciation over the accounting period.  This amount of Depreciation would be the Depreciation Expense for the accounting period.  Therefore, Depreciation Expense must be added back to the NET value of Fixed Assets to figure the true amount of the change in Fixed Assets (the true amount of cash USED). o Thus, the Investment in Fixed Assets is $11,939 + $28,941. o The same logic (and math) is applied even if there is a decrease in the Fixed Assets on the Balance Sheet. The Procedure for Non-cash Expenses on the Cash Flow Statement • Cash Flows for Depreciation Expense o Depreciation Expense is a non-cash transaction that is used to reduce taxable income.  Net Income is a cash flow (a SOURCE if a profit and a USE if a loss). Thus, Net Income (whether a profit or loss) was understated by the Depreciation Expense, so it is added back as a cash flow. o The GAIN ON THE SALE OF A FIXED ASSET is usually listed under OTHER INCOME AND EXPENSES on the Income Statement  It is actually a non-cash transaction since it is only the accounting difference between the selling price and the book value of an asset (reference pg 171 in Riggs).  Since a GAIN is a non-cash transaction that overstates Net Income, it will show as a USE of cash under CASH FLOWS FROM INVESTING ACTIVITIES.  Similarly, a LOSS understates Net Income and will be a SOURCE of cash. 