A firm had an equipment with an original cost of $500,000. The equipment was to be depreciated straight line over 5 years. After the second year the firm (two years of depreciation taken) divests (sells) the equipment for $350,000. What will be the difference between the firm's CFO and Net Income due to this sale?

Explanation: The accumulated depreciation should be $200,000 and the book value of the equipment $300,000. As it sells for $350,000, there is a $50,000 profit. This will have to be deducted from Net Income when we are computing CFO (the profit should end up in CFI). Easiest to think of this as CFO being calculated by the indirect method.