Question

Illinois Woodworking Company is preparing its statement of cash flows using the indirect

method. During the year, Illinois Woodworking sold equipment for $6490 cash. The net book
value of the asset was $4770. Which of the following statements is true?
A) The cash receipt of $6490 is shown as a positive cash flow in the investing activities section.
B) The gain on sale of $1720 is shown as a positive cash flow in the financing activities section.
C) The gain on sale of $1720 is added back to net income in the operating activities section.
D) The book value of the asset sold is shown as a negative cash flow in the investing activities
section.

Answer 1

A) The cash receipt of $6490 is shown as a positive cash flow in the investing activities section.

Step-by-step explanation:

The Statement of Cash Flow represents cash receipts and their sources.

A typical CashFlow statement is divided into 3 segments:

• Operating Activities
• Investing Activities
• Financing Activities

Sale & Purchase of Fixed Assets are considered as Investing Activities. Therefore the total cash receipts from such is shown as a positive entry in the statement.

However under the Operating activity, the profit on disposal is adjusted from the Operating Profit when adjusting for items not involving flow of cash. This is if the Cashflow statement is prepared using the indirect method.

Answer 2

A) The cash receipt of $6490 is shown as a positive cash flow in the investing activities section.

Step-by-step explanation:

The neet book value of the equipment sold, is a non-cash item, so all the money reveiced from the sale is reflecting on as a positive cash flow in the financing activities section.