Question

Equipment which cost $426,000 and had accumulated depreciation of $228,000 was sold for $222,000. This transaction should be shown on the statement of cash flows (indirect method) as a(n):________.
A) deduction from net income of $24,000 and a $222,000 cash inflow from investing activities.
B) deduction from net income of $24,000 and a $198,000 cash inflow from investing activities.
C) addition to net income of $24,000 and a $222,000 cash inflow from financing activities.D) addition to net income of $24,000 and a $198,000 cash inflow from financing activities.

Answer 1

Answer:

A) deduction from net income of $24,000 and a $222,000 cash inflow from investing activities

Explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation, changes in current assets (other than cash) and liabilities are considered as operating activities including income taxes.  

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

When an asset is sold, the gain on disposals is a non cash items that will be deducted (or added where a loss was made on disposal) to the net income. The amount received from the disposal is recognized as an inflow in the investing section of the cash flow statement.

The gain/(loss) from disposal

= $222,000 - ($426,000 - $228,000)

= $24,000