[Anonymous]

Hi all,

I’m having trouble understanding one of the answer solutions in Wiley Test Bank relating to the statement of cash flows.

“Jackson Co. classifies trading securities as an operating activity based on their nature and purpose. In a statement of cash flows in which the operating activities section is prepared under the indirect method, the realized gain on an investment in securities held for trading should be presented as

a) deduction from net income in the amount of the gain

b) cash inflow from investing activities

c) both a deduction from net income in the amount of the gain and cash inflow from investing activities

d) addition to net income in the amount of the securities fair value at the beginning of the period.

According to the answer key, the correct answer is D.

” cash inflows and outflows from trading securities may be included in either operating or investing activities, based on the nature and purpose of the securities. Unrealized gains and losses on trading securities should be included in current income. Therefore, trading securities are carried at fair value and the amount of realized gain on the sale is the difference between the securities’ fair value at the beginning of the period and the amount of appreciation to the date of sale. Net income is the starting point when preparing the operating activities section of a statement of cash flows using the indirect method. Since the realized gain on sale is already included as a component of net income, only the fair value (carrying amount) of the securities at the beginning of the period must be added to net income. The total cash inflow from the sale (carrying amount plus realized gain) will then be included in operating activities.”

I thought the answer should be A because gains are not cash inflows, and are noncash transactions that are deducted from net income on the statement of cash flows?

[Gatorbates]

In GAAP Acctg, realized gains and losses are a part of the income statement in arriving at NI. In the indirect method, you start with NI, which has the realized Gain/Loss already in it, then you do the operating, investing and financing sections.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

In GAAP Acctg, realized gains and losses are a part of the income statement in arriving at NI. In the indirect method, you start with NI, which has the realized Gain/Loss already in it, then you do the operating, investing and financing sections.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Anonymous]

yes, but i thought since a gain is just an appreciation in value, not a cash flow, it should be deducted from net income under the indirect method?

[Anonymous]

yes, but i thought since a gain is just an appreciation in value, not a cash flow, it should be deducted from net income under the indirect method?

[Gatorbates]

It's a “realized gain” (they sold the stock). Therefore cash exchanged hands, and must be reflected in the CF statement. In this case, the realized gain is “buried” in the net income # that starts the indirect cash flow method.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

It's a “realized gain” (they sold the stock). Therefore cash exchanged hands, and must be reflected in the CF statement. In this case, the realized gain is “buried” in the net income # that starts the indirect cash flow method.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Anonymous]

Hello Gator,CPA, just as you said that realized gain that's “buried” in the NI, which means it was already included in NI, why do we have to add it back again, when in fact, gains are one of the deduction items under indirect method for SCF?

[Anonymous]

Hello Gator,CPA, just as you said that realized gain that's “buried” in the NI, which means it was already included in NI, why do we have to add it back again, when in fact, gains are one of the deduction items under indirect method for SCF?

[Gatorbates]

You don't have to add it back in. The wording of the question is a bit odd. Or my explanation wasn't quite clear. Apologies. The answer “D” is stating that you add it to the FMV of the security at the beginning of the period. I assumed it was “already in there” and booked when initially sold, meaning it would have already in there (NI). Apparently, the call of the question is asking “where should the gain be” in the CF statement. If it's a realized gain, it should be booked on the I/S, thus being included in the net income. If it wasn't booked at that time, it would be booked at sometime before the CF statement is prepared, and would be booked as the difference between the FMV at the beginning of the period and the value at the date of sale.

If I'm not explaining it easily, you can always do process of elimination:

It is not A, because, it's a gain and would increase NI.

It is not B, because, it's not an investing activity. Trading securities, are current assets. Investing activities are non current assets

It is not C, because, it is not an investing activity (same as answer b) and it is not a reduction to NI, since it is a gain, which increases NI (same as answer A)

If I'm not clear enough, apologies, it's late and I'm exhausted! 🙂

Hopefully that may clear some of it up

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

You don't have to add it back in. The wording of the question is a bit odd. Or my explanation wasn't quite clear. Apologies. The answer “D” is stating that you add it to the FMV of the security at the beginning of the period. I assumed it was “already in there” and booked when initially sold, meaning it would have already in there (NI). Apparently, the call of the question is asking “where should the gain be” in the CF statement. If it's a realized gain, it should be booked on the I/S, thus being included in the net income. If it wasn't booked at that time, it would be booked at sometime before the CF statement is prepared, and would be booked as the difference between the FMV at the beginning of the period and the value at the date of sale.

If I'm not explaining it easily, you can always do process of elimination:

It is not A, because, it's a gain and would increase NI.

It is not B, because, it's not an investing activity. Trading securities, are current assets. Investing activities are non current assets

It is not C, because, it is not an investing activity (same as answer b) and it is not a reduction to NI, since it is a gain, which increases NI (same as answer A)

If I'm not clear enough, apologies, it's late and I'm exhausted! 🙂

Hopefully that may clear some of it up

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Whopper Warrior]

Personally, I dont like this questions wording. Also, I could of swore cash proceeds went into investing activities, but whatever.

confused co sold operating securities for 100 at the end of fy1 with a basis of 80 at the beginning of fy 1. This is the only transaction for the year and confused co had no other income. confused co had no starting cash at fy1.

confused co

statement of cash flows

begining cash 0

from operating

net income 20

basis of stock 80

cash from operating 100

ending cash 100

however, I always understood it as.

from operating

net income 20

less gain (20)

from operating 0

from investing

proceeds from sale of stock 100.

what leaves me confused. Is how is the fv an addition to gain. unrealized holding gains aside (which would add an aditional layer of complexiy) some of that fmv at year end included cash paid basis. basis is not gain. I think it should read where does the basis of the stock go, because by thier standards the gain is already in income and therefore no further action is needed…I would not get to terribly hung up on this one problem if you can knock out the other questions regarding cash flows.

please pardon my spelling, sent from a phone.

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

Becker Only

[Whopper Warrior]

Personally, I dont like this questions wording. Also, I could of swore cash proceeds went into investing activities, but whatever.

confused co sold operating securities for 100 at the end of fy1 with a basis of 80 at the beginning of fy 1. This is the only transaction for the year and confused co had no other income. confused co had no starting cash at fy1.

confused co

statement of cash flows

begining cash 0

from operating

net income 20

basis of stock 80

cash from operating 100

ending cash 100

however, I always understood it as.

from operating

net income 20

less gain (20)

from operating 0

from investing

proceeds from sale of stock 100.

what leaves me confused. Is how is the fv an addition to gain. unrealized holding gains aside (which would add an aditional layer of complexiy) some of that fmv at year end included cash paid basis. basis is not gain. I think it should read where does the basis of the stock go, because by thier standards the gain is already in income and therefore no further action is needed…I would not get to terribly hung up on this one problem if you can knock out the other questions regarding cash flows.

please pardon my spelling, sent from a phone.

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

Becker Only

[Anonymous]

Yeah I think this question is just one of those weird ones…

Thanks for the replies tho

[Anonymous]

Yeah I think this question is just one of those weird ones…

Thanks for the replies tho

[Gatorbates]

Trading securities are a current asset. All Investing activities on CF are non current assets. Therefore the cash proceeds from realized gains on trading securities are not investing activities. And yes, weird, messed up wording on this question.

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Author]

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