Well lets go ahead and extend our particular problem again, basically adding a lot of notes on what is going to happen in 2012. So what we are going to here is make it so that we are going to sell the car. So please note that the original story was that we bought the car in 2010 and it was a $10,000 car, (D15=-10,000) and that is what that -10,000 is and we took out a 10,000 loan, (in 2010 to purchase the car.) In 2011 we paid the single payment loan in full so there is that 10,000 worth of a principle payment, (in cell E18) and there was 1000 in interest, (cell E4.) We also went ahead and decided that because we bought the car, the sales person was going to have a spike in sales for one year, (in 2010 for $1000) and in 2011, the sales, (operating revenue) went back to the level they were before to the purchase of the vehicle. What was nice about owning the vehicle is that the operating expenses was going to stay low for whatever reason because they are always going to be about $1500 less.

What we are going to do in 2012 is sell the car and let’s look at what that is going to mean for us. First, the car was sold for $6000, (which is different than the book value and we will see how that plays out.) Note that, because we already paid off the car, there is not going to be a loan payment which means there is not going to be any interest expense. Also, you will spot that we are only going to have only half a year’s worth of depreciation, so I am taking that $1920 that you’d expect to see in 2012 and just cutting it in half, because that is the year we are going to sell the car. So what I am doing right now is like before and sorting out what the taxable income is and again just verifying, it is just going to be the operating revenue less all those expenses that are there, which is the 540 in taxable income. What that means is that relative to the state in where we did NOT buy the car, relative to what it would be, you know this counter historical example, we’ve gotten 540 more of taxable income than we would have - that means that our taxes our going to be 270 higher than they would have been if we hadn’t purchased this car and all that other fun stuff and we are going to have a net income that is a little bit higher because of it. Feeding all this stuff back in to the cash flow statement – here is our net income,(cell F8 = 270) and, here is our depreciation, (cell F5 = 960.)

Now here is how to represent the sale of the vehicle; what I have done here is said that, look, there is this positive inflow of 6000 and that is how you represent the sale. We received cash because we got rid of, (sold) the car. Now that 6000 is not exactly what its book value is because, if you notice, we’ve taken a 10000 car and depreciated it. You first depreciated it 2000, then depreciated it 3200, then it was depreciated 960, that is not exactly 4000, it is actually a little bit more than that. And so what we have done here is said that, look, since you are selling it for a bit more, you are going to have to pay back some of that depreciation. So if you sort out what this equation is doing right here , it is taking that 10000 which you bought the vehicle for and is subtracting from it the sum of D5 through F5, where D5 through F5 are the sum of your depreciation, (2000+3200+960=6160) So what we are developing right there inside this first set of parenthesis is just going to be the book value of the vehicle, (book value = cost basis - sum depreciation) okay?

And if you think about it, the book value is 10000 – 2000 = 8000, (for 2010) then it is 8000-3200=4800, (for 2011) then it is 4800-960= 3840, (for 2012) which is something that is significantly lower than 6000, (book value = 6160) Now what we are doing is finding out how much we overstated the deprecation, so I am cutting off the taxes for right now and we will get back to it.

What that says is that you have overstated the amount of the value you have lost from the vehicle by 2160 over these last four years. Now, what the gains tax is supposed to be is that depreciation recapture, this is you paying back the government, so all I am doing is saying that well, look, you are going to pay them back at the same tax rate we were dealing with before. And right there, are the additional 1080 in taxes you have to pay.

Now the 1080 that you see there is one of the exceptions to the rule that says that anything that is on the cash flow statement positive number means flow in, negative means flow out. Gains taxes are typically depicted so that a positive number means an increase in taxes. So when we take a look at net cash flow at the end you have to do a little special treatment and what I am doing now is adding together all the normal parts of the cash flow statement, meaning the net income, the depreciation , the cash we got from the sale of the car, that bit of the loan and then subtracting OFF the gains tax with is the F16 cell, and that is how you represent them a sales of a vehicle, by adding in that line, F15, an extra 6000 in cash coming in. How you represent depreciation which you are going to have in the year you sell the car remembering it is only half of what you normally get, and finally then that depreciation recapture, that gains tax you have to pay when you sell the car for something other than book value. If you sell the car for something less than book value, the government owes you money.