Question

Sheffield Corp. sold some of its plant assets during 2021. The original cost of the plant assets was $904000 and the accumulated depreciation at date of sale was $843000. The proceeds from the sale of the plant assets were $90800.
The information concerning the sale of the plant assets should be shown on Sheffield's statement of cash flows (indirect method) for the year ended December 31, 2021, as a(n):

A) subtraction from net income of $29,800 and a $61,000 increase in cash flows from financing activities.
B) addition to net income of $29,800 and a $90800 increase in cash flows from investing activities.
C) subtraction from net income of $29,800 and a $90800 increase in cash flows from investing activities.
D) addition of $90800 to net income.

Answer 1

Answer:

The correct answer is Option C.

Explanation:

In the indirect cash flows statement, there are 3 sections, namely: net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.

The items in the question only affect the first two. Under the net cash flows from operating activities, we need to subtract the gain realized from the disposal of the plant assets from net income, which is Sales proceed minus Net book value, i.e., $90,800 - ($904000- $843000) = $29,800.

The sales proceed is $90,800. This would be recognized as cash inflow under net cash flows from investing activities.