Question

Cash Flow from Operating Activities

Using the information for the Seville Corporation, calculate the cash flow from operating activities.
Accounts payable increase $ 10,800
Accounts receivable increase 4,800
Accrued liabilities decrease 3,600
Amortization expense 6,000
Cash balance, January 22,000
Cash balance, December 15,000
Cash paid as dividends 29,000
Cash paid to purchase land 90,000
Cash paid to retire bonds payable at par 60,000
Cash received from issuance of common stock 35,000
Cash received from sale of equipment 17,000
Depreciation expense 29,000
Gain on sale of equipment 4,800
Inventory decrease 15,600
Net income 91,200
Prepaid expenses increase 2,400
Use a negative sign with answer to show cash outflow from (used by) operating activities.

Answer 1

The gain on the sale of equipment is subtracted from the cash flow from operating activities because it is considered an investing activity, not an operating activity. It does not represent cash flow generated from the company's core operations and must be adjusted for when using the indirect method for cash flow calculation.

Step-by-step explanation:

When calculating cash flow from operating activities, the gain on the sale of equipment is considered an investing activity rather than an operating activity. To adjust the operating cash flow accordingly, this gain should be subtracted from the operating activities section, as it does not represent cash generated from the core business operations.

Using the indirect method of calculating cash flow, the gain on sale of equipment reported on the income statement would be removed to reconcile net income with cash provided by operating activities. This is because the gain increases the reported net income, but does not involve an actual cash transaction in the context of operating activities.

For instance, if a company reported an accounting profit, as shown in referenced materials, one would calculate operating cash flow by subtracting any gains arising from non-operating activities like the sale of equipment. This ensures that the accounting profit is adjusted to reflect only the cash flows from regular business operations.