Question

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?
A. In investment activities as a reduction of the cash inflow from the sale.
B. In investment activities as a cash outflow.
C. In operating activities as a deduction of income.
D. In operating activities as an addition to income.

Answer 1

Answer:

C. In operating activities as a deduction of income.

Explanation:

When preparing a cash flow statement as per indirect method, activities not related to direct operations of the company are reversed in operating income.

Sale of used equipment is not general day to day operations of the company and thus, gain on sale of equipment which is credited earlier adding into income is now reversed by deducting from net income under operating cash flow section.

In investing activities the entire sale consideration is added in cash fow and not just the gain from such sale.

Thus, correct option is

C. In operating activities as a deduction of income.