CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
Under IFRS, a company sells a machine for more than its carrying amount and reports a gain in net income. When preparing operating cash flow using the indirect method, the gain is most likely:
The gain is subtracted from net income in operating activities, and the full sale proceeds are reported as an investing cash inflow. The gain is a non-operating item embedded in net income, so removing it prevents double counting of the sale's cash effect.
- Aadded to net income, with proceeds shown in financing activities
- Bsubtracted from net income, with total sale proceeds shown in investing activitiesCorrect
- Cleft in net income, with only the gain shown in investing activities
Explanation
The gain is a non-operating item included in net income but is not an operating cash flow. It is subtracted in the operating section, and the full cash proceeds from the sale are reported as an investing inflow. Adding the gain would double count, and showing only the gain in investing understates the proceeds.
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