Hubble Corporation, which uses the indirect method to prepare its statement of cash flows, sold used equipment for cash. Which statement regarding this sale is TRUE?
A)The cash from operating activities will be greater if the direct method is used to prepare the statement of cash flows.
B)The effect on cash from operating activities depends on whether there was a gain or loss on sale.
C)The cash from operating activities will be less if the direct, rather than indirect, method is used to prepare the statement of cash flows.
D)The cash from operating activities will not be reported if the indirect method is used to prepare the statement of cash flows.

Question

Quizplus · Accepted Answer

The effect on cash from operating activities depends on whether there was a gain or loss on the sale. If there was a gain, it should be deducted from net income to arrive at net cash provided by operating activities; if there was a loss, it should be added back to net income to arrive at net cash provided by operating activities. The choice of using the direct or indirect method does not affect the treatment of a gain or loss on sale of equipment.

Hubble Corporation, Which Uses the Indirect Method to Prepare Its