Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 9 Fixed Assets and Intangible Assets 419

SUMMARY OF LEARNING GOALS

Depreciation and amortization are deducted from revenues in

determining the net income. However, depreciation and amor-

tization expense do not reduce cash. Thus, in the Operating

Activities section of the statement of cash flows under the indi-

rect method, the depreciation and amortization expense for the

period should be added back to net income in order to adjust

the accrual net income amount to reflect operating cash flow.

In addition, proceeds from the sale of fixed assets are included

in the Investing Activities section of the statement of cash

flows.

To illustrate these disclosures, the partial Operating

Activities section of the statement of cash flows for Marriott

International, Inc., shows depreciation adjustments in order to

reconcile net income to cash generated by operating activities.

The proceeds from the sale of fixed assets and the cash used
to purchase fixed assets are disclosed in the Investing Activities

section of the statement of cash flows. These are both illustrated

for Marriott as follows:

Fixed Assets, Depreciation, and Cash Flow

FOCUS ON CASH FLOW

Marriott International, Inc.

Partial Statement of Cash Flows—Operating Activities

For the Year Ended December 31, 2004

Cash flows from investing activities:

Purchase of fixed assets $(181)

Proceeds from sale of fixed assets 402

Other 66

Net cash provided by investing activities $ 287

Marriott International, Inc.

Partial Statement of Cash Flows—Investing Activities

For the Year Ended December 31, 2004

Define, classify, and account for the cost of fixed
assets.Fixed assets are long-term tangible assets that
are owned by a business and are used in the normal opera-
tions of the business. Examples of fixed assets are equip-
ment, buildings, and land. The initial cost of a fixed asset
includes all amounts spent to get the asset in place and
ready for use. For example, sales tax, freight, insurance in

transit, and installation costs are all included in the cost

of a fixed asset. Once a fixed asset is placed in service,

expenditures can be made to repair, improve, or extend

the asset’s life. Expenditures to repair an asset are treated

as revenue expenditures, and expenditures to improve

or extend the asset’s life are treated as capital

expenditures.

1

Cash flows from operating activities:

Net income $594

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization 166

Other adjustments 131

Net cash provided by operating activities $891