If a manufacturing company reports a loss on disposal of fixed assets on its income statement, is this: A. Investing Activity B. Financing Activity C. Operating Activity
The loss itself is C, but the sale price is A.
You have the cash movement deriving from the sale of the fixed assets (investing cash flow) and cash movement deriving from the loss of the disposal (operating cash flow). Answer is C.
These cash flow questions about equipment (gains and losses and proceeds) confuse me. I’m pretty sure the answer is that the loss is added back to net income to compute CFO. But, if the question asked: If a manufacturing company recorded the following: “Proceeds from sale of equipment…70,000” Is this: A. CFO activity B. CFI activity C. CFF activity why?
Always CFO but in this case you subtract to net income
Proceeds from sale of equipment are accounted as CFI. When you buy a machine you have a cash outflow, when you sell the same machine you record an inflow from investing activity (because this was once your investment). Gain/Loss is used to correctly identify proceeds from sale, because if you don’t have this information from Income Statement you will only see a net change in BS. This net change need to be corrected for this gain/loss on sale in order to find the true cash effect of that transaction. p.s. So I see that the original question is not about cash flows…Sorry! Milos
Yes…sorry for my previous post…Milos you are right and below you can find the journal entry: On date of sale: Cash account Dr Fixed Assets account Cr On date of transfer of profit or loss to P&L account : If loss : Fixed asset account Dr P&L account Cr If profit: P&L account Dr Fixed asset account Cr. While drawing the cash flow statement: The cash flow will be categorized under Investing activity. If there is profit, the amount of profit will be deducted from Income from operations. If there is loss, the amount of loss will be added to Income from operations.
Milos, thanks for your posts. When I said Cash Flows I meant Cash Flows from Operations, Cash Flows Financing, etc.