Dear WSO,
I had a question about the 3 financial statements. So if I sell $10 in PPE my pre-tax income goes up $10 and with a 40% tax rate net income is up $6. On my balance sheet, evidently my cash goes up $6 which increases my retained earnings by $6, but there is 0 change on my PP&E on the balance sheet. Shouldn't selling $10 of PPE decrease your PPE on the balance sheet?
P.S. i'm having trouble understanding when to add or subtract a gain/loss on the CFS. So I'm currently messing around and plugging in a change of $10 for different things and haven't finished on everything but am I right to understand that everything (so far other than adding a gain in AP and subtracting decrease in AP) that is
1: A gain is subtracted from Net income to get CF from operations and all losses is added from net income to get CF from operations?
2: In some cases you add it back due to investing/financing activities, when will you add or subtract it back? Do they always cancel out or will you sometimes subtract from net income to get CF from ops and then subtract again from say, income from financing?
3: Is there a general way to remember when you need to add/subtract back due to CF from financing/investing? 4: And Changes in operating assets/liabilities aren't included in the second add/subtract back right? I.E. you wouldn't subtract due to gain in asset and then add it back
The amount of PPE that decreases on your balance sheet is the book value of the PPE that was sold. For example, if I sold PPE for $100, which had a book value of $50, only $50 of PPE is subtracted from the B/S figure. By the way, your pre-tax income only goes up by the net gain over the book value of PPE you just sold, so if you sell $10 in PPE, unless the BV of said PPE is zero, you won't record $10 increase in pre-tax income.
As a rule of thumb, only factor cash changes in your CFS. Depreciation and amortisation is obviously added back since these are non-cash changes, interest expense is usually NOT added back unless it is non-cash, e.g. PIK interest. Changes in working capital are added back because these are on cash terms.
For cash generated from investing, if it's an outflow like capex, then it's subtracted from net change in cash, if an asset is sold then it's an inflow so you would add it to net change in cash. From financing, the typical inflow and outflow are debt issuance or debt paydown respectively.
Hope this is useful!
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