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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

A company's plant had a book value of Rs 50 lakh and was sold at a loss of Rs 8 lakh. In the indirect-method cash flow statement, how should this be treated?

The loss of Rs 8 lakh is added back to profit in operating activities, and the actual proceeds of Rs 42 lakh are shown as an investing inflow. Proceeds are book value less the loss, and the gain or loss itself is not a cash flow.

  1. AAdd back Rs 8 lakh in operating activities and show Rs 42 lakh as an investing inflowCorrect
  2. BDeduct Rs 8 lakh in operating activities and show Rs 50 lakh as an investing inflow
  3. CShow Rs 8 lakh as an investing outflow only
  4. DAdd back Rs 8 lakh in operating activities and show Rs 58 lakh as an investing inflow
  5. Ignore the loss and show Rs 42 lakh as a financing inflow

Explanation

Proceeds equal 50 minus 8, which is 42, an investing inflow. The loss is a non-cash item reducing profit, so it is added back in operating activities. Showing 50 or 58 misstates proceeds.

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