[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]

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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