The activities for the year ended December 31,2018 included the following:
∙ Sold a held-for-trading investment for $10,000.The book value was $15,000.
∙ Sold an available-for-sale investment for $10,000.The book value was $5,000.
Using the indirect method,how much would be presented as cash flow from operating activities?
A)Proceeds from disposal in the amount of 10,000.
B)Proceeds from disposal in the amount of 20,000.
C)Loss on sale in the amount 5,000.
D)Adjustment of $5,000 on loss and Adjustment of $(5,000)on gain and +$10,000 from proceeds of HFT investment.

Question

Quizplus · Accepted Answer

Under the indirect method, cash flows from operating activities are computed by adjusting net income for non-cash items such as depreciation and gains or losses from investments. In this case, since the company sold two investments, we need to adjust for the gain and loss on disposal.

For the held-for-trading investment, there is no gain or loss as the company realized the same amount as the book value. Therefore, we only add back the proceeds from the sale of $10,000 to arrive at a positive adjustment of $10,000.

For the available-for-sale investment, there is a gain of $5,000 ($10,000 proceeds - $5,000 book value). Since gains decrease net income, we need to subtract this amount from net income to arrive at an adjustment of $(5,000).

Therefore, the total adjustment for the two investment sales is +$10,000 - $(5,000) = $5,000, which would be presented as cash flow from operating activities. The other choices are incorrect because they do not take into account the adjustments needed for the investment sales.

The Activities for the Year Ended December 31,2018 Included the Following