If a company extinguishes debt,which of the following explains the effect of this transaction on a statement of cash flows?
A)If the debt is extinguished with a loss,the loss is subtracted from the operating section if the company uses the direct method.
B)If the debt is extinguished with a loss,the loss will not appear in the operating or the investing section if the company uses the direct method.
C)If the debt is extinguished with a gain,the gain is added to the cash flow from financing section if the company uses the indirect method.
D)If the debt is extinguished with a gain,the gain is added to the operating section if the company uses the indirect method.
E)If the debt is extinguished with a loss,the loss is added to the financing section if the company uses the indirect method.

Question

Quizplus · Accepted Answer

When a company extinguishes debt with a loss and uses the direct method for its statement of cash flows, the loss does not appear in the operating or investing sections. Instead, such transactions typically affect the financing section, where cash flows related to debt repayment are reported. The direct method focuses on the specific cash flows in and out of the business, and the extinguishment of debt, whether at a gain or a loss, is directly related to financing activities rather than operating or investing activities.

If a Company Extinguishes Debt,which of the Following Explains the Effect