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Chapter 14: Q8RQ (page 768)

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Short Answer

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Answer

Any loss on disposal of long-term assets should be added back to the net income in the operating activities section of the statement of cash when using indirect method.

Step by step solution

01

Loss on disposal of long-term assets

If there is a loss on disposal of long-term assets then such loss is debited to the statement of profit and loss accountwhich means net income is reduced by loss amount.

02

Loss on disposal of long-term assets should be added back to the net income

Sale of long-term asset is an investing activity hence it should be adjusted under the heading cash flows from investing activity. Therefore, loss on disposal of long-term assets is added back to the net income in the operating activities section of the statement of cash flows when using direct method.

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Most popular questions from this chapter

Question: Big Island, Inc. began 2018 with cash of \(40,000. During the year, Big Island earned revenue of \)200,000 and collected \(120,000 from customers. Expenses for the year totaled \)160,000, of which Big Island paid \(65,000 in cash to suppliers and \)80,000 in cash to employees. The company received \(2,000 cash for interest revenue and paid \)10,000 for income taxes. Big Island also paid \(35,000 to purchase equipment and a cash dividend of \)15,000 to its stockholders during 2018. Prepare the company鈥檚 operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.

Preparing the statement of cash flows鈥攊ndirect method

Accountants for Morganson, Inc. have assembled the following data for the year ended December 31, 2018:

2018 2017 Current Assets: Cash \( 99,400 \) 25,000 Accounts Receivable 64,100 69,700 Merchandise Inventory 83,000 75,000 Current Liabilities: Accounts Payable 57,600 55,200 Income Tax Payable 14,800 16,800

Transaction Data for 2018:

Issuance of common stock for cash \( 38,000

Payment of notes payable \) 46,100

Depreciation expense 24,000

Payment of cash dividends 50,000

Purchase of equipment with cash 74,000

Issuance of notes payable to borrow cash 62,000

Acquisition of land by issuing long-term notes payable 119,000

Gain on sale of building 4,500 Book value of building sold 54,000

Net income 68,500

Prepare Morganton'sstatement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities.

Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.

Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company鈥檚 statement of cash flows鈥攊ndirect method鈥攆or the year ended December 31, 2018. Assume investments are purchased with cash.

Computing operating activities cash flow鈥攊ndirect method

The records of Vintage Color Engraving reveal the following:

Net income \( 36,000

Depreciation expense \) 5,000

Sales revenue 53,000

Decrease in current liabilities 19,000

Loss on sale of land 4,000

Increase in current assets other than cash 10,000

Acquisition of land 35,000

Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.
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