A company uses the indirect method to prepare the statement of cash flows. It sold a piece of equipment at a loss of $8600. The equipment was purchased several years ago for $72,500 and had accumulated depreciation of $57,900. What is reported under the operating activities section on the statement of cash flows?
A)Cash proceeds of $6000 are subtracted from net income.
B)Cash proceeds of $6000 are added to net income.
C)The loss of $8600 is subtracted from net income.
D)The loss of $8600 is added to net income.

Question

Quizplus · Accepted Answer

The loss of $8600 is added back to net income in the operating activities section because the indirect method starts with net income and then adjustments are made for non-cash expenses and losses/gains on sales of assets. The loss on the sale of equipment is a non-cash expense that reduced net income, so it is added back to reconcile net income to net cash provided by operating activities.

A Company Uses the Indirect Method to Prepare the Statement