Question

A flood damaged a building and contents. The receipts from insurance companies totaled $600,000, which was $180,000 less than the book values. The tax rate is 30%. On the statement of cash flows (indirect method), the flood loss should
a. be shown as an inflow from investing activities of $438000.
b. be shown as an addition to net income of $438000.
c. be shown as an inflow from investing activities of $611000
d. not be shown.

Answer 1

The correct answer is d. not be shown.

It should be shown as an addition to net income of $180,000

Explanation:

• Given information are,

• The receipts from insurance companies totaled $600,000

• The receipt of insurance was $180,000 less than the book values.

• The tax rate is 30%.

• The cash flows (indirect method), the flood loss should not be shown
• It should be shown as an addition to net income of $180,000.
• The indirect method gives the statement of cash flows from beginning with the net income or loss.
• Most companies chooses to report the cash flow statement by using the indirect method because the accounting provides a better measure when the cash flows of the business activity.
• An indirect method is defined as a reporting format for the cash flow statement which begins with net income and controls it for the cash operating activities throughout the year to arrive at the ending cash balance.