JGMH Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

Question

BlackTom AI · Accepted Answer

Question restatement: JGMH Inc. sold equipment for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated in the operating activities section of the cash flows statement (indirect method)?

Option 1: The gain is added back to net income in the operating activities section.
This is incorrect. A gain on the sale of equipment increases net income, but under the indirect method we adjust net income to reconcile to cash from operating activities. Adding the gain would overstate cash provided by operations because the cash inflow from the sale is reported in investing activities, not operating activities.

Option 2: A sale of equipment is an investing activity; the transaction will not affect the operating activities section.
This statement is misleading for the indirect method. While the cash flow from the sale is indeed classified as an investing activity, the gain (or loss) affects net income and must be adjusted in the operating activities section to convert accrual net income to cash basis. So the transaction does indirectly affect operating activities through the adjustment for the gain or loss.

Option 3: The gain is subtracted from net income in the operating activities section.
This is correct. In the indirect method, you start with net income and adjust for non-cash items and non-operating items. A gain on sale increases net income but does not provide operating cash; thus you subtract the gain to reverse its effect and reflect actual cash from operations.

Option 4: The entire sales price is subtracted from net income in the operating activities section.
This is incorrect. The entire cash proceeds from the sale are part of investing activities. Subtracting the full sale price from net income in operating activities would misclassify cash flows and double-count the transaction's effects. The correct treatment is to adjust for the gain (not the full sale price) in operating activities while reporting the cash inflow in investing activities.

BU.210.650.51.FA25 Quiz I- Requires Respondus LockDown Browser

JGMH Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

View Explanation

Log in for full answers

Similar Questions

On the cash flows statement, which of the following is related to the production of the firm’s goods or services?

Cash flows related to day to day activities of a business are referred to, on a Cash Flow Statement, as

Cash flows related to day to day activities of a business are referred to, on a Cash Flow Statement, as

Paying property taxes is which type of business activity?

Operating activities consist of:

One factor of importance of the Cash Flow Statement to the Product Manager is tracking whether there is enough cash available to fund product development or innovation projects. The section of the Cash Flow Statement that would give the Product Manager these incites is:

How would Interest Paid be classified in a Cash Flow Statement?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler