Question

10. Describe the relation between Gross PP&E, Net PP&E, and depreciation.

11. How are stocks categorized under financing activities different from stocks categorized under investment activities on the Statement of Cash Flows?

Answer 1

1. Property plant & equipment (PP&E) comes under fixed assets (non current assets). Once any firm or company purchases PP&E, then the PP&E gives the benefits for more than one accounting period. Or we can say that it gives benefit to the period to which it is being put to use.So its cost should also be allocated to the periods benefitted or to the periods it is being put to use. This allocation of the cost of PP&E over its useful life is called depreciation.

Now, in the balance sheet, PP&E is reported at its carrying value or Net PP&E amount, which is Gross PP&E less Accumulated Depreciation. Accumulated depreciation means the depreciation amount charged on PP&E till date.

In the balance sheet, PP&E is first shown at the historical cost which is the original cost or amount spent to acquire the PP&E. This is also the Gross PP&E (adjusted for sale or transfers of PP&E, if any). It is shown under the non current assets section.

A separate contra account is then created by the name of accumulated depreciation, in which, the total amount of depreciation charged till date is recorded. This account is shown in the balance sheet as a deduction from the Gross PP&E account. The amount left after deducting the accumulated depreciation from the gross PP&E is called as net PP&E or the net carrying value of the PP&E.

Depreciation, on the other hand, is an expense of the period, to which it relates. So it is deducted from the income in the income statement.

From this discussion, it can be said that the depreciation is actually the expired cost of the gross PP&E.

2. In the cash flow statement, the items that come under financing activities are the ones that affect the composition of debt and equity or cash flows from creditor oriented and owner oriented activities. The examples of cash inflows are issue of stocks and bonds. While examples of cash outflows are paying back or redemption of stocks and bonds. So, in financing activities section, the sources of capital and debts are shown.

On the other hand under investment activities section, cash flows from purchase or sale of non current assets is shown. Examples of cash inflows are sale of stocks held as investment, making loans to other entities. While examples of cash outflows are purchasing of trading, available for sale and held to maturity securities of other entities.So, in the investing activities section, where the cash is invested is shown.