Gannon Corporation uses the indirect method to prepare its statement of cash flows. Following this approach, a gain on sale of equipment was deducted from profit for the year in computing net cash from operating activities. The most likely reason for this adjustment is that:
A) The sale of equipment did not result in the receipt of any cash by Gannon Corporation.
B) The sale resulted in a cash receipt in an accounting period different from the period in which the gain was recognized.
C) The amount of the gain recognized was not equal to the cash received.
D) This type of transaction is not classified as an operating activity.

Question

Quizplus · Accepted Answer

The gain on sale of equipment is classified as an investing activity, not an operating activity. Therefore, it is deducted from net income in the operating section of the cash flow statement to avoid double counting, as the cash received from the sale is reported in the investing section.

Gannon Corporation Uses the Indirect Method to Prepare Its Statement