Page 113 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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the asset purchase is not an expense, its cash cost appears as a
capital expenditure.
But maybe the company borrowed the money for the equip-
ment. What then? The statement considers that purchasing
equipment and borrowing money for the purchase are two sepa-
rate decisions, so they’re treated separately in the statement
details. Although the company might have recovered that cash
by borrowing the money to purchase this equipment, this was
still a commitment of cash and so it appears here as a deduction
from the cash produced by net income. Had the company
financed the purchase, an offsetting item would appear in the
Financing section of this statement. You’ll notice there is no large
influx of cash in the Financing section, so it appears that Wonder
Widget did not borrow money for this purchase. Rather, it raised
the money from other sources, including its available cash.

Short-Term Investments Sold
Sometimes a company will invest excess cash so that the money
will be working for the company until it’s needed in operations.
Such investments are typically short-term commitments, such as
bank certificates of deposit or marketable securities, which the
company sells when it needs the cash. Emerging companies with
successful public offerings of their stock (more on this in Chapter
12) often raise a lot of cash before they are ready to use it. Large
public companies that sell bonds or additional shares of their
stock will also have extra cash on hand, destined for some future
corporate purpose. Short-term investments are a way to earn
income from these otherwise idle cash balances.
When an investment is purchased, it appears as a cash
expenditure that would be shown in this section as a reduction
in cash. When an investment is sold, as has apparently
occurred in our example, the net proceeds of the sale—except
for the gain or loss on the sale, which is in the statement of net
income—become an additional source of cash. Wonder Widget
raised $24,000 in this fashion, presumably to partially pay for
its equipment purchase.