Question

On the statement of cash flows prepared by the indirect method, a $50,000 gain on the...

On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be

a.deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends.

b.deducted from net income in converting the net income reported on the income statement to cash flows from operating activities.

c.added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends.

d.added to net income in converting the net income reported on the income statement to cash flows from operating activities.

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Answer #1

The Indirect method of Cash flow is classified into three parts to present the cashflow transaction in most effective way. Following are the parts:

01. Operation Activities: These are related to primary revenue generating activities of business. Example- Sales,Purchases,Trade payable, Trade receivable etc.

02. Investing Activities: These are activities which changes the investment status of company. Example- Sale of asset, Purchase of Asset etc

03. Financial Activities: These are activities related to owners fund. For example: Issue of shares, Dividends etc.

In the given question, the gain from sale of Investment should be shown under Investment activities by adding the profit to Income from Investment activities.

in given 4 options Investment activities are not provided, hence it is assumed that the business of assesse is of investments,and the profits can be added to operation activities.

The answer is (d).added to net income in converting the net income reported on the income statement to cash flows from operating activities.

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