Question

Equipment which cost $436000 and had accumulated depreciation of $243000 was sold for $216000. This transaction should be shown on the statement of cash flows (indirect method) as a(n)

a. deduction from net income of $23000 and a $193000 cash inflow from investing activities.
b. addition to net income of $23000 and a $216000 cash inflow from financing activities.
c. addition to net income of $23000 and a $193000 cash inflow from financing activities.
d. deduction from net income of $23000 and a $216000 cash inflow from investing activities.

Answer 1

The sale of equipment with a book value of $193,000 for $216,000 results in a $23,000 gain, reported as a cash inflow of $216,000 in investing activities and a $23,000 deduction from net income on the statement of cash flows using the indirect method.

Step-by-step explanation:

The question deals with how to represent a transaction involving the sale of equipment on the statement of cash flows using the indirect method. When equipment that cost $436,000 and had an accumulated depreciation of $243,000 is sold for $216,000, the book value of the equipment is the cost minus accumulated depreciation ($436,000 - $243,000 = $193,000). The gain or loss on sale is the difference between the sale price and the book value of the equipment ($216,000 - $193,000 = $23,000 gain).

On the statement of cash flows, the sale results in a cash inflow in the investing activities section. Since the indirect method starts with net income and the gain is included in the net income, it must be subtracted out to reconcile net income to net cash provided by operating activities. Therefore, on the statement of cash flows, there would be a $216,000 cash inflow reported under investing activities and a $23,000 deduction from net income to remove the gain included in the net income.