Investing and financing cash flows: asset sales, debt and dividends
Investing and financing cash flows are shown gross. Sale proceeds equal the asset's book value plus any gain (minus any loss). Capital spending falls out of the property, plant, and equipment (PP&E) roll-forward, and dividends paid fall out of the retained earnings roll-forward.
Before this: The direct method and converting indirect to direct
On the exam
- Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
Describe and compute investing and financing cash flows from statement data. Expect proceeds from an asset sale, capital spending from PP&E balances, or dividends paid from retained earnings, plus a reconciliation to the change in cash.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
How do you find the cash from selling equipment?
Start with the book value, then add any gain or subtract any loss. The book value is original cost minus accumulated depreciation .
These proceeds from sale of equipment are an inflow in cash flow from investing activities . The gain or loss is not cash: it only tells you how the price compares to book value.
Equipment that cost 800.00 with accumulated depreciation of 600.00 is sold at a gain of 100.00 (negative means a loss). Cash proceeds are closest to:
800.00 − 600.00 + 100.00 = 300.00
Cash proceeds300.00
- 800−600+100=300
- 800ENTER600−100+300
ENTER enter (on the HP, puts the number on the stack)
How do you find capital spending?
Use the gross PP&E roll-forward: opening gross PP&E plus purchases minus the cost of assets sold equals closing gross PP&E. Rearrange for purchases. These are capital expenditures , an outflow in investing.
Gross PP&E rose from 6,000.00 to 6,700.00. Equipment with an original cost of 800.00 was sold. Purchases of PP&E were closest to:
6,700.00 − 6,000.00 + 800.00 = 1,500.00
Purchases (capital expenditures)1,500.00
- 6700−6000+800=1500
- 6700ENTER6000−800+1500
ENTER enter (on the HP, puts the number on the stack)
If the question gives net PP&E instead (cost less accumulated depreciation), the sale must be handled at book value.
For Orchard: net PP&E 4,000 → 4,800, so 800 + 500 + 200 = 1,500, the same answer. CFI is purchases out and proceeds in: 300 − 1,500 = −1,200.
How do you find dividends and the other financing flows?
Dividends come out of the retained earnings roll-forward. Debt and shares are the change in the related balances, shown gross.
Dividends paid are a financing outflow under US generally accepted accounting principles (GAAP). The other financing lines: debt issued and repaid (shown separately), and share issuance less buybacks. Cash flow from financing activities is their total.
Retained earnings were 4,000.00 at the start and 4,725.00 at the end. Net income was 1,125.00. With no other changes, dividends were closest to:
4,000.00 + 1,125.00 − 4,725.00 = 400.00
Dividends declared and paid400.00
- 4000+1125−4725=400
- 4000ENTER1125+4725−400
ENTER enter (on the HP, puts the number on the stack)
How do the three sections add up?
Their sum, cash flow from operating activities (CFO) plus investing plus financing, is the net change in cash, and it must match the two balance sheets. For Orchard: CFO 1,520 + CFI −1,200 + CFF +150 = +470. Opening cash of 900 becomes 1,370.
- 1520−1200+150= 470
- +900= 1370
- 1520ENTER1200−150+ 470
- 900+ 1370
ENTER enter (on the HP, puts the number on the stack)
Operating activities generated 1,520.00, investing activities -1,200.00 and financing activities 150.00. The net change in cash is closest to:
1,520.00 + -1,200.00 + 150.00 = 470.00
Net change in cash470.00
- 1520+1200+|-+150=470
+|- change sign
- 1520ENTER1200CHS+150+470
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Edit the roll-forwards and watch the three sections reconcile to the balance sheets.
Try this 0 of 3
- Make the cost of assets sold the unknown in gross PP&E
- Change the gain on the sale. Does capex move?
- Find a closing retained earnings balance that means no dividends were paid
Gross PP&E
Accumulated depreciation
Retained earnings
The equipment sale
Book value sold = 800 − 600 = 200. Proceeds = 200 + 100 = 300.
Does the cash add up?
| Cash from operations | +1,520 |
|---|---|
| Investing: proceeds 300 − capex 1,500 | −1,200 |
| Financing: 600 − 200 + 150 − dividends 400 | +150 |
| Net change in cash | +470 |
| Balance sheets: 1,370 − 900 | +470 ✓ |
Show working
Capex = closing 6,700 − opening 6,000 + cost of assets sold 800 = 1,500
Accumulated depreciation check: 2,000 + 500 − 600 = 1,900
Dividends = opening 4,000 + net income 1,125 − closing 4,725 = 400
CFO 1,520 + CFI −1,200 + CFF +150 = +470
- 6700−6000+800=1500
- 6700ENTER6000−800+1500
ENTER enter (on the HP, puts the number on the stack)
- 4000+1125−4725=400
- 4000ENTER1125+4725−400
ENTER enter (on the HP, puts the number on the stack)
- Investing Memorize
- Proceeds from asset sales book value ± gain or loss
- Capital expenditures from the PP&E roll-forward
- Purchases and sales of securities and loans to others
-
- Financing Memorize
- Debt issued less repaid
- Shares issued less bought back
- Dividends paid from the retained earnings roll-forward
-
Exam tip If a number is not given, a roll-forward will give it to you.
Go deeper Why investing and financing are always gross
Netting a big purchase against a big sale, or a new loan against a repayment, would hide how much the company really invested or borrowed. Standards therefore present investing and financing flows gross, even when operating cash flow uses the indirect method.
Go deeper Dividends payable and non-cash asset purchases
If the company declared dividends but has not paid them all, dividends paid equal dividends declared minus the increase in dividends payable. Assets acquired with debt or shares are non-cash transactions (lesson 1), so they do not enter capital expenditures in the statement; they are disclosed. Interest and dividends received can sit in investing under International Financial Reporting Standards, or IFRS (next lesson).
Memorize this
MemorizeFormulas to know cold
| Item | Formula |
|---|---|
| Book value | cost − accumulated depreciation |
| Sale proceeds | book value + gain (or − loss) |
| Capex | closing gross PP&E − opening + cost of assets sold |
| Capex (net PP&E) | Δ net PP&E + depreciation + book value sold |
| Dividends paid | opening RE + net income − closing RE |
| Change in cash | CFO + CFI + CFF |
Memory hook Proceeds = book value, then up for a gain or down for a loss. Capex = how much PP&E grew, plus what you sold.
Know it cold Investing and financing are shown gross: never net a purchase against a sale or a repayment against a borrowing.
- Investing Memorize
- Proceeds from asset sales book value ± gain or loss
- Capital expenditures from the PP&E roll-forward
- Purchases and sales of securities and loans to others
-
- Financing Memorize
- Debt issued less repaid
- Shares issued less bought back
- Dividends paid from the retained earnings roll-forward
-
Quick example
Equipment cost 320 with accumulated depreciation 250 is sold at a loss of 12. Book value 70; 70 − 12 = 58.
- 320−250−12= 58
- 320ENTER250−12− 58
ENTER enter (on the HP, puts the number on the stack)
Quick example
Gross PP&E rises from 3,000 to 3,400 and equipment that cost 150 was sold. 3,400 − 3,000 + 150 = 550.
- 3400−3000+150= 550
- 3400ENTER3000−150+ 550
ENTER enter (on the HP, puts the number on the stack)
Quick example
Net PP&E rises from 1,800 to 1,950, depreciation is 260 and sold assets had a book value of 45. 150 + 260 + 45 = 455.
- 1950−1800+260+45= 455
- 1950ENTER1800−260+45+ 455
ENTER enter (on the HP, puts the number on the stack)
Quick example
Retained earnings go from 900 to 1,040 with net income of 310. 900 + 310 − 1,040 = 170.
- 900+310−1040= 170
- 900ENTER310+1040− 170
ENTER enter (on the HP, puts the number on the stack)
Quick example
CFO 640, CFI −520, CFF −90. 640 − 520 − 90 = 30.
- 640−520−90= 30
- 640ENTER520−90− 30
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
Proceeds with a loss
Equipment cost 640, accumulated depreciation 470, sold at a loss of 25. Proceeds?
640 − 470 − 25 = 145. Adding the loss (195) or using book value (170) is the trap.
-
Dividends from retained earnings
RE 3,100 to 3,420, net income 540. Dividends?
3,100 + 540 − 3,420 = 220. The change in RE (320) is the trap.
-
Capex from net PP&E
Net PP&E up 180, depreciation 300, book value of equipment sold 80. Capex?
180 + 300 + 80 = 560. Ignoring the asset sold (480) is the trap.
-
Missing section
Cash rose 30, CFO 640, CFI −520. CFF?
30 − 640 + 520 = −90.
Exam traps
- Reporting the gain, or the book value, as the cash proceeds.
- Adding a loss to book value instead of subtracting it.
- Forgetting to add back the cost of assets sold when solving for capital spending.
- Using the change in retained earnings as the dividend. Net income also moves retained earnings.
Checkpoint
3 exam-style questions. About 90 seconds each.
1Equipment with an original cost of JPY 500m and accumulated depreciation of JPY 380m is sold at a loss of JPY 30m. The cash proceeds are closest to:
2Opening retained earnings are EUR 2,400k, net income is EUR 600k and closing retained earnings are EUR 2,750k. With no other changes, dividends paid are closest to:
3A company repays part of the principal on a bank loan and pays the interest due on it. Under US GAAP, the principal repayment is most likely classified as a(n):
Key takeaways
- Proceeds = book value ± gain or loss.
- Capex = closing gross PP&E − opening + cost of assets sold.
- Dividends = opening RE + net income − closing RE.
- CFO + CFI + CFF = change in cash.
Quick example
Equipment cost 320 with accumulated depreciation 250 is sold at a loss of 12. Book value 70; 70 − 12 = 58.
- 320−250−12= 58
- 320ENTER250−12− 58
ENTER enter (on the HP, puts the number on the stack)
Quick example
Gross PP&E rises from 3,000 to 3,400 and equipment that cost 150 was sold. 3,400 − 3,000 + 150 = 550.
- 3400−3000+150= 550
- 3400ENTER3000−150+ 550
ENTER enter (on the HP, puts the number on the stack)
Quick example
Net PP&E rises from 1,800 to 1,950, depreciation is 260 and sold assets had a book value of 45. 150 + 260 + 45 = 455.
- 1950−1800+260+45= 455
- 1950ENTER1800−260+45+ 455
ENTER enter (on the HP, puts the number on the stack)
Quick example
Retained earnings go from 900 to 1,040 with net income of 310. 900 + 310 − 1,040 = 170.
- 900+310−1040= 170
- 900ENTER310+1040− 170
ENTER enter (on the HP, puts the number on the stack)
Quick example
CFO 640, CFI −520, CFF −90. 640 − 520 − 90 = 30.
- 640−520−90= 30
- 640ENTER520−90− 30
ENTER enter (on the HP, puts the number on the stack)
All Financial Statement Analysis formulas, every lesson
Practice exam-style questions on Analyzing Statements of Cash Flows I
Questions about this lesson?
Where this comes back
- Cash flow statements under IFRS vs US GAAP Analyzing Statements of Cash Flows I
- Analyzing Statements of Cash Flows II Financial Statement Analysis
Questions candidates ask
How do you calculate proceeds from the sale of equipment?
Take the book value (original cost minus accumulated depreciation) and add the gain or subtract the loss. Cost 800, accumulated depreciation 600 and a gain of 100 give 800 − 600 + 100 = 300 of cash proceeds.
How do you calculate dividends paid from retained earnings?
Opening retained earnings plus net income minus closing retained earnings. Opening 4,000, net income 1,125 and closing 4,725 give 400. If dividends payable changed, adjust for it: cash paid is declared less the increase in payable.
How do you calculate capital expenditures from the balance sheet?
Use gross PP&E: closing minus opening plus the original cost of assets sold. With net PP&E, add the change in net PP&E, depreciation and the book value of assets sold.
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