Question

n 2017, Valencia Company purchased equipment for $363,000 and also sold some special purpose machinery with a book value of $155,000 for $182,000. In its statement of cash flows for 2017, Valencia should report the following with respect to the above transactions: a.$181,000 net cash used by investing activities; $27,000 net cash provided by operating activities. b.$181,000 net cash used by investing activities. c.$363,000 net cash used by investing activities. d.$363,000 cash used by operating activities; $182,000 cash provided by financing activities.

Answer 1

b.

Step-by-step explanation:

‘Cash Flow Statement’ is one of major financial statement that indicates the inflow and outflow of cash along with the reasons by categorizing each cash transaction in three activities i.e., operating, investing or financing activity. Non-cash transactions are not considered while preparing a cash flow statement.

Given:

Purchased Equipment = $363,000

Sold machinery for $182,000, costing $155,000.

Thus, the firm incurred gain on sale of machinery.

Gain on sale of asset = $182,000 - $155,000

Gain on sale of asset = $27,000

Now, the following would the effects of the above mentioned transactions:

1. Gain on sale of asset of $27,000 would be shown as a deduction under operating activities section of cash flow statement.
2. Purchase of equipment of $363,000 would be shown as a deduction (outflow of cash) under investing activities section of cash flow statement.
3. Cash received from sale of machine of $182,000 would be shown as an addition (cash inflow) under investing activities section of cash flow statement.

Thus, following would be the net effect of the above mentioned transactions:

1. $27,000 net cash used by operating activities.
2. $181,000 net cash used by investing activities

Note:

Net cash used by investing activities = Purchase of equipment + cash received from sale of machinery

Net cash used by investing activities = ($363,000) + $182,000

Net cash used by investing activities = ($181,000)