Question

• ABC Corporation sold an unused building for $177,000. The building's book value on the date of sale was $172,000. How will this transaction appear in a statement of cash flows prepared using the indirect method?

• What is free cash flows? How do you calculate it?

• The following information is available from the current period financial statements:

Net income	$140,000
Depreciation expense	28,000
Increase in accounts receivable	16,000
Decrease in accounts payable	21,000

• What is the net cash flow from operating activities using the indirect method?

• Why do some financial expert refer to the Statement of Cash Flows as the most "honest" of the four required statements?

Answer 1

1. First we will calculate loss or gain on sale as per below:

Gain on sale = Sale price - Book value

Gain on sale = $177000 - $172000 = $5000

Now, in the statement of cash flows prepared using indirect method, gain on sale of $5000 will be deducted from the net income in the cash flows from operating activities section.

Also, sales of $177000 will be put under cash inflows from investing activities section.

2. Free cash flows represents the cash left after all operating expenses and capital expenditures are paid.

Free cash flows = Cash from operations - Capital expenditure.

3. Net cash flows from operating activities:

Description	Amount
Net income	$140000
Add: Depreciation expense	$28000
Less: Increase in accounts receivable	- $16000
Less: Decrease in accounts payable	- $21000
Net cash flows from operating activities	$131000

4. Statement of cash flows is considered as most honest of all the four required statements because it is based on the actual values. Actual cash inflows and outflows are recorded in the statement of cash flows. No estimates or forecasts or projections are involved in the statement of cash flows.