[seattleacct]

I need a little help with the explanation of the answer for the following question:

In a statement of cash flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:

A. With no addition or subtraction

B. Less the loss

C. (doesn’t matter)

D. (doesn’t matter)

The answer is B.

I answered A, because I figured that the cash inflow from “investing activities” line on the statement of CF would show the carrying amount, while the loss was reflected in Net Income. I know the total cash inflow is the carrying amount less the loss, but shouldn’t the Investing Activities section only show the carrying amount, while the loss is included in Net Income (to be reversed out in the operating section)?

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[Anonymous]

the loss is a result of the equipment sale, so its an investing activity. you cant separate out the loss separately.

[Anonymous]

the loss is a result of the equipment sale, so its an investing activity. you cant separate out the loss separately.

[Whopper Warrior]

the cf from investing would show the total amount of cash recieved. the loss would be reversed in operating activities by adding it back.

example. sell equipment for 50 with a basis of 70. no other income and no starting cash. ending cash is 50 (the selling price)

net income (20)

operating activities

loss on equipment 20

investing

equipment sold 50

financing

0

net cash 50

As we see the loss, is non cash, and therefore needs to be reversed. If we used carrying amount we would be effectively double counting.

same idea but at a gain (70 selling price, 50 basis)

net income 20

operating

gain (20)

investing

selling 70

financing

0

net cash 70

what if we reversed the gain and only used basis? we double count the reversal of gain and understate cash by 20.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

the cf from investing would show the total amount of cash recieved. the loss would be reversed in operating activities by adding it back.

example. sell equipment for 50 with a basis of 70. no other income and no starting cash. ending cash is 50 (the selling price)

net income (20)

operating activities

loss on equipment 20

investing

equipment sold 50

financing

0

net cash 50

As we see the loss, is non cash, and therefore needs to be reversed. If we used carrying amount we would be effectively double counting.

same idea but at a gain (70 selling price, 50 basis)

net income 20

operating

gain (20)

investing

selling 70

financing

0

net cash 70

what if we reversed the gain and only used basis? we double count the reversal of gain and understate cash by 20.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[seattleacct]

I think the loss needs to be separated, at least on the balance sheet. Wouldn't the journal entry be something like this? (using made up numbers):

Dr. Cash: 40

Dr. Equipment A/D: 15

Dr. Loss on Sale of Equipment: 5

Cr. Equipment: 60

And isn't the loss reversed out of Operating Activities because it's included in Net Income?

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

I think the loss needs to be separated, at least on the balance sheet. Wouldn't the journal entry be something like this? (using made up numbers):

Dr. Cash: 40

Dr. Equipment A/D: 15

Dr. Loss on Sale of Equipment: 5

Cr. Equipment: 60

And isn't the loss reversed out of Operating Activities because it's included in Net Income?

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[Whopper Warrior]

the journal entry would be

(dr) cash 50

(cr) equipment 70

(dr) loss 20

if we added accumulated depreciation

(dr) cash 50

(dr) accum depr 20

(cr) equipment 90

(dr) loss 20

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

the journal entry would be

(dr) cash 50

(cr) equipment 70

(dr) loss 20

if we added accumulated depreciation

(dr) cash 50

(dr) accum depr 20

(cr) equipment 90

(dr) loss 20

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[seattleacct]

I really really appreciate your help… but I'm still confused as to how the ‘cash' amount got into the “investing activities” section.

With your journal entry, the loss would be recorded under “income” while the equipment is recorded under PP&E fixed assets. So, wouldn't we just use the numbers from the fixed assets for the investing section, in this scenario? The loss being a part of net income would be reversed out in the operating activities section, because it was a non cash event. We only use the balance sheet accounts for the statement of cash flows, plus the net income, right? Then reverse out all noncash items.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

I really really appreciate your help… but I'm still confused as to how the ‘cash' amount got into the “investing activities” section.

With your journal entry, the loss would be recorded under “income” while the equipment is recorded under PP&E fixed assets. So, wouldn't we just use the numbers from the fixed assets for the investing section, in this scenario? The loss being a part of net income would be reversed out in the operating activities section, because it was a non cash event. We only use the balance sheet accounts for the statement of cash flows, plus the net income, right? Then reverse out all noncash items.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[Jennifer241]

Using the above example

(dr) cash 50

(cr) equipment 70

(dr) loss 20

Remember the cash flow statement wants to report how much cash came into the company for an investment activity. So looking at the above example we can easily see that it is $50.00.

This question just words it to be the carrying cost of the equipment (70.00) less the loss (20.00) so 70.00-20.00 = 50.00 which is our cash from the sale of the equipment.

AUD - Jan 9,13 Pass
REG - Aug 30,13 Pass
BEC - Oct 26,13 Pass
FAR - Dec 4,13 Pass

Licensed CPA in the state of Oregon

[Jennifer241]

Using the above example

(dr) cash 50

(cr) equipment 70

(dr) loss 20

Remember the cash flow statement wants to report how much cash came into the company for an investment activity. So looking at the above example we can easily see that it is $50.00.

This question just words it to be the carrying cost of the equipment (70.00) less the loss (20.00) so 70.00-20.00 = 50.00 which is our cash from the sale of the equipment.

AUD - Jan 9,13 Pass
REG - Aug 30,13 Pass
BEC - Oct 26,13 Pass
FAR - Dec 4,13 Pass

Licensed CPA in the state of Oregon

[Study Monk]

seattleacct,

I believe why you are confused is you are thinking of the statement of cash flows as an accrual financial statement. The statement of cash flows is a cash basis statement that doesn't follow the same rules as most of the accrual accounting you have been studying. The statement of cash flows only follows transactions that have real decreases or increases of cash or cash equivalents.

The loss on a sale of equipment is not actually a loss of the physical asset of cash. Its a loss that probably has to do with depreciation. But even if the loss is do to you being lazy on looking for a buyer you are not actually losing cash money due to the loss. The loss really only affects your evaluation as a company.

All losses that occur that force you to give up actual cash money would be included on the statement of cash flows. Remember that the statement of cash flows is like a bank account and you are just showing the financial statement users what you are spending your physical cash on and how you are getting your physical cash. Journal entries shouldn't be a concern when you are answering statement of cash flow questions because in most cases they are not valid because they have accrual accounting concepts like depreciation, accounts payable, and accounts receivable (all of these don't reduce or increase cash).

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

seattleacct,

I believe why you are confused is you are thinking of the statement of cash flows as an accrual financial statement. The statement of cash flows is a cash basis statement that doesn't follow the same rules as most of the accrual accounting you have been studying. The statement of cash flows only follows transactions that have real decreases or increases of cash or cash equivalents.

The loss on a sale of equipment is not actually a loss of the physical asset of cash. Its a loss that probably has to do with depreciation. But even if the loss is do to you being lazy on looking for a buyer you are not actually losing cash money due to the loss. The loss really only affects your evaluation as a company.

All losses that occur that force you to give up actual cash money would be included on the statement of cash flows. Remember that the statement of cash flows is like a bank account and you are just showing the financial statement users what you are spending your physical cash on and how you are getting your physical cash. Journal entries shouldn't be a concern when you are answering statement of cash flow questions because in most cases they are not valid because they have accrual accounting concepts like depreciation, accounts payable, and accounts receivable (all of these don't reduce or increase cash).

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Whopper Warrior]

we reverse the loss/gain in operations because it is a non cash event that is not associated with normal operations (the buying and selling of goods). We then include the cash recieved in investing activities because we are trying to reflect cash transactions not balance sheet.

To answer your balance sheet problem.

reversal of loss 20

cash on equipment 50

total 70

equals

basis of 70

or if we were to use the reversal (70 sale, 50 basis)

reversal of gain (20)

cash on equp 70

total 50

equals

basis of 50

as you can see the total effect reflects the total balance sheet account it is just reflected between operations (reversal of gain/loss) and investing (cash received).

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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