Question

An analysis of the general ledger accounts indicates that equipment, with an original cost of $200,000 and accumulated depreciation of $170,000 on the date of sale, was sold for $20,000 during the year. Using this information, indicate the items to be reported on the statement of cash flows using the indirect method.

Cash flows from operating activities:
$___
Cash flows from investing activities:
$___

Answer 1

The sale of equipment is reflected in cash flows from investing activities, not operating activities, on the statement of cash flows using the indirect method. The loss from the sale is added back to net income in the operating activities section. The cash inflow from the sale, $20,000, is reported under cash flows from investing activities.

Step-by-step explanation:

The sale of the equipment is not reported under cash flows from operating activities using the indirect method. Instead, it is included in cash flows from investing activities. The calculation for the proceeds from the sale is the selling price minus the net book value of the equipment.

In this case, the equipment's original cost is $200,000, and the accumulated depreciation is $170,000, leading to a net book value of $30,000. The equipment was sold for $20,000, which means there is a loss of $10,000 ($20,000 sale proceeds - $30,000 net book value).

This loss should be added back to the net income in the operating activities section because the indirect method begins with net income, and any loss from the sale decreases net income on the income statement. Therefore, to adjust for the accurate cash provided by operating activities, you add back the loss.

The cash inflow from the sale, which is $20,000, should be reported under cash flows from investing activities because it relates to the disposal of a long-term asset.