Question

Gannon Corporation uses the indirect method to prepare its statement of cash flows. Following this approach, a gain on sale of equipment was deducted from net income in computing net cash flow from operating activities. The most likely reason for this adjustment is that:

Answer 1

Answer:

This type of transaction is not classified as an operating activity.

Explanation:

From the question we are informed about Gannon Corporation who uses the indirect method to prepare its statement of cash flows. Following this approach, a gain on sale of equipment was deducted from net income in computing net cash flow from operating activities. In this case, The most likely reason for this adjustment is that this type of transaction is not classified as an operating activity.

The indirect method produces

statement of cash flows by starting with net income/loss, along with making subsequent additions/deductions of values solely from amount for non-cash revenue as well as expense items which result to cash flow from operating activities. Operating activities can be regarded as daily activities of a particular company that brings about production and selling their products, as well as generating revenues, and

general administrative with maintenance activities.