Sell PP&E for 120 with a book value of 100; which statements are true about Net Income and Cash Flow from Investing?

Sell PP&E for 120 with a book value of 100; which statements are true about Net Income and Cash Flow from Investing?

• A. Net Income increases by 12; Cash from Investing increases by 120
• B. Net Income increases by 20; Cash from Investing increases by 120
• C. Net Income decreases by 12; Cash from Investing decreases by 120
• D. Net Income increases by 12; Cash from Investing increases by 20

Answer: (A)

When you dispose of PP&E, the cash flow impact comes from the cash you actually receive, while net income reflects the gain or loss on the disposal. Here, selling PP&E for 120 after its book value was 100 means you record a cash inflow of 120 in the investing activities, and you recognize a gain of 120 − 100 = 20 in net income (assuming no taxes or other adjustments). So, net income would increase by 20, and cash flow from investing would increase by 120. The cash flow effect is straightforward—the sale price is the cash you get. The income effect hinges on the gain on disposal, which is the sale price minus the book value. If taxes were involved, they would reduce the net income gain accordingly, but with no tax considerations specified, the gain—and thus the NI increase—equals 20.

When you dispose of PP&E, the cash flow impact comes from the cash you actually receive, while net income reflects the gain or loss on the disposal. Here, selling PP&E for 120 after its book value was 100 means you record a cash inflow of 120 in the investing activities, and you recognize a gain of 120 − 100 = 20 in net income (assuming no taxes or other adjustments).

So, net income would increase by 20, and cash flow from investing would increase by 120. The cash flow effect is straightforward—the sale price is the cash you get. The income effect hinges on the gain on disposal, which is the sale price minus the book value. If taxes were involved, they would reduce the net income gain accordingly, but with no tax considerations specified, the gain—and thus the NI increase—equals 20.