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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I

A company sells equipment with a carrying amount of 40,000 for 52,000 cash. The gain is included in net income. Under the indirect method, the most appropriate treatment is to:

The 12,000 gain is subtracted from net income in operating cash flow, and the full 52,000 sale proceeds are reported as an investing inflow. This prevents the gain being counted in both sections, because the cash from the asset sale belongs entirely in investing activities.

  1. Adeduct the 12,000 gain from net income in CFO and report 52,000 as an investing inflowCorrect
  2. Badd 12,000 to net income in CFO and report 40,000 as an investing inflow
  3. Creport 52,000 as an operating inflow and make no adjustment to net income

Explanation

The gain is non-operating cash-wise, so it is subtracted from net income in CFO to avoid double counting. The entire 52,000 proceeds is an investing inflow. Adding the gain or using carrying amount misstates both sections.

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