Using the indirect method, if equipment is sold at a gain, the
A)sale proceeds received are deducted in the operating activities section.
B)sale proceeds received are added in the operating activities section.
C)amount of the gain is added in the operating activities section.
D)amount of the gain is deducted in the operating activities section.

Question

Quizplus · Accepted Answer

In the indirect method of preparing the cash flow statement, the gain on the sale of equipment is deducted from net income in the operating activities section. This is because the gain is included in the net income, but it does not affect cash since it is a non-cash transaction. Deducting the gain adjusts for the fact that it increased net income but did not increase cash.

Using the Indirect Method, If Equipment Is Sold at a Gain