CSO: 1A1d LOS: 1A1g
Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows for the most recent year end. Mitchell is planning to use the indirect method to prepare this statement, and has made the following list of cash inflows for the period.
• Net income of $100,000.
• Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000.
• Proceeds from the issuance of additional company stock totaling $10,000.
The correct amount to be shown as net cash provided by operating activities is
The classified "Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000" as financing activity.
I understood that cash proceeds from sale of securities is INFLOW to net income --> this is financing activity.
gain on sale of securities which is $25,000 should be subtracted from net income --> this is under operating activity. Therefore, the answer should be $75,000.
Could you please help me to solve this question?
Thank you and have a nice day,
Best regards from Huong, Vietnam
I agree with your assessment.The $25,000 of gain on the sale would be included in Net Income and should be subtracted from operating activities and the $125,000 would be included as an Investing activity.
It appears that their question/answer assumes that the gain was not included in net income, but I think that is an incorrect assumption.The $100,000 is the only reasonable answer on this list, but I still am certain this is incorrect.Thx.-mh
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