Question

If a business sells for $8,000 equipment that cost $25,000 and has $20,000 of accumulated depreciation, how is this reported in the statement of cash flows? Multiple Choice $8,000 cash inflow in financing activities, and $3,000 loss as an addition to net income under operating activities $8,000 cash inflow in financing activities, $3,000 gain as an addition from net income under operating activities $8,000 inflow as an investing activity, and $3,000 gain as a subtraction from net income under operating activities $8,000 cash outflow as an investing activity

Answer 1

Solution: The answer is $8,000 inflow as an investing activity and $3,000 gain as a subtraction from net income under operating activities.

Explanation: Cash flow from investing activities is a section of the cash flow statement that shows the cash generated or spent relating to investment activities. Investing activities include purchase and sale of long term assets such as property, plant and equipment. So sale of equipment for $ 8,000 is an inflow under an investing activity.

Profit = Selling price of equipment - (Cost - Accumulated Depreciation)

= $8,000 - ($25,000 - $20,000)

= $8,000 - $5,000 = $3,000

Under operating activities profit or loss from regular business activities are considered but profit from sale of equipment is not a regular business activity so it is subtracted from the net profit under operating activities.

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