Question

BuzzInc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

Answer 1

Answer:

The gain should be deducted from net profit before tax and interest while calculating cash flows from operations and the cash proceeds is shown under investing activities as positive cash flow.

Explanation:

Since the cash flow is about actual cash received in period,the gain is irrelevant.But the gain must have been added in income statement in arriving at net income,hence in order to avoid double counting the gain impact should be eliminated whereas the cash received from the disposal is brought in down the line under investing activities as cash inflow.

The overall impact of this transaction on cash flow statement is illustrated below:

Gain                       -$45000

Cash proceeds       $230000

Net impact             $185000

The transaction has  $185000 impact on the cash flow statement as a whole.