CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
When preparing a cash flow statement by the indirect method, a loss on the sale of equipment is most likely:
The loss is added back to net income in operating activities because it reduced income without using cash, and the cash proceeds from the sale are reported as an investing inflow. Subtracting it or ignoring it would misstate operating cash flow.
- Aadded back to net income in operating activities, with sale proceeds shown in investingCorrect
- Bsubtracted from net income in operating activities, with proceeds shown in financing
- Cignored in operating activities, with the loss shown as an investing outflow
Explanation
A loss reduced net income but is non-cash, so it is added back in operating activities. The actual cash proceeds from the sale are reported as an investing inflow.
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