Question

What do we do with losses on sale when calculating the net income for SOCF?

1) Add them to the net income
2) Subtract them from the net income
3) Ignore them
4) Cannot be determined

Answer 1

In the Statement of Cash Flows (SOCF), losses on sale are added back to the net income as they are non-cash expenses and do not affect the company's actual cash flow.

Step-by-step explanation:

When calculating the net income for the Statement of Cash Flows (SOCF), any losses on sale need to be added back to the net income. This is because such losses are considered non-cash expenses and therefore, they decrease the net income on the income statement, but they do not affect the actual cash flow of the company.

To reflect the true cash position in the SOCF, these losses need to be adjusted because the actual cash has not decreased as a result of the loss on sale. A loss on disposal of an asset represents the amount by which the sale proceeds of the asset fall short of its carrying amount on the books, which indicates a non-cash accounting entry that does need to be accounted for on the SOCF.

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