[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

[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).

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[Author]

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