Question

When using the indirect method, the gain from selling a long-term investment is recognized in which of the following?

a.
In the Operating Activity section of the statement of cash flows

b.
In the Financing Activities section of the statement of cash flows

c.
In the noncash Investing or Financing Activities supplemental section of the statement of cash flows

d.
Gains are not recognized in the statement of cash flows under the indirect method

Answer 1

Using the indirect method, a gain from selling a long-term investment is subtracted in the Operating Activities section of the cash flow statement to reconcile net income to net operating cash flow.

Step-by-step explanation:

When using the indirect method to prepare a statement of cash flows, a gain from selling a long-term investment is typically removed from net income in the Operating Activities section. Since gains are considered non-cash transactions and they increase net income on the income statement, they are subtracted back out on the cash flow statement to reconcile net income to net cash provided by operating activities. Thus, the correct answer to this question would be a. In the Operating Activity section of the statement of cash flows.