CMA Study Group

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock
was sold for $150,000 during the current fiscal year. The result of this transaction should be shown
in the Investing Activities Section of James' Statement of Cash Flows as
a. Zero.
b. $50,000.
c. $100,000.
d. $150,000.

Correct answer: d.

I would like to ask if someone know better this answer....when we have a gain from selling stocks isn't it similar to gain on sale of equipment.
Because when we have gain on sale of equipment, this gain should be in operating cash flow. So why is correct d and not c ? 
(i thought 100000 in investing and 50000 in operating)....

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Panagiotis Papadopoulos
Controller
Greece
------------------------------

The Investing section of the cash flow statement always gets the full amount of cash flow for a particular item.  In this case, stock was sold for $150,000, so the entire amount goes in the Investing section.  

Not enough information is provided to know if there's an impact to the Operating section.  The gain/loss adjustment in the Operating section would occur in the year of the gain/loss, not the year of the sale.  By way of example, however, if the gain in this question occurred in the same year as the sale, the Investing section would still show the full $150,000.  The Operating section would show the $50,000 gain as an adjustment to net income (note - that this is not a cash flow number.  It's merely an adjustment to net income to arrive at a cash flow number for the Operating section).

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Michael Ramsey
Director/Manager
Omaha NE
United States
------------------------------

Original Message:
Sent: 10-22-2020 09:35 AM
From: Panagiotis Papadopoulos
Subject: Cash Flow Statement - Gain on sale stocks

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock
was sold for $150,000 during the current fiscal year. The result of this transaction should be shown
in the Investing Activities Section of James' Statement of Cash Flows as
a. Zero.
b. $50,000.
c. $100,000.
d. $150,000.

Correct answer: d.

I would like to ask if someone know better this answer....when we have a gain from selling stocks isn't it similar to gain on sale of equipment.
Because when we have gain on sale of equipment, this gain should be in operating cash flow. So why is correct d and not c ?
(i thought 100000 in investing and 50000 in operating)....

------------------------------
Panagiotis Papadopoulos
Controller
Greece
------------------------------

When the stock was purchased the outflow of cost should be recorded in the investment section as -100,000.00. When this investment are sold the inflow is recorded as+150,000.00.
why we record this to investing section and not to operating. 

Operating section of cash flow should record cash flow from day today operations. Like sales, payables etc.

Purchasing stock of other company is not regular day today activity and as per question they are purchased three years ago so they are consider to be longterm investment.

Hope this helps :) 

 

------------------------------
Munaf Karovadiya
Accountant
Mesquite TX
United States
------------------------------

Original Message:
Sent: 10-22-2020 09:35 AM
From: Panagiotis Papadopoulos
Subject: Cash Flow Statement - Gain on sale stocks

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock
was sold for $150,000 during the current fiscal year. The result of this transaction should be shown
in the Investing Activities Section of James' Statement of Cash Flows as
a. Zero.
b. $50,000.
c. $100,000.
d. $150,000.

Correct answer: d.

I would like to ask if someone know better this answer....when we have a gain from selling stocks isn't it similar to gain on sale of equipment.
Because when we have gain on sale of equipment, this gain should be in operating cash flow. So why is correct d and not c ?
(i thought 100000 in investing and 50000 in operating)....

------------------------------
Panagiotis Papadopoulos
Controller
Greece
------------------------------

This is not a part of the normal day to day operations. Only an investment in another company.

------------------------------
Carol Sabbag
Consultant
Norwood MA
United States
------------------------------

Original Message:
Sent: 10-22-2020 09:35 AM
From: Panagiotis Papadopoulos
Subject: Cash Flow Statement - Gain on sale stocks

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock
was sold for $150,000 during the current fiscal year. The result of this transaction should be shown
in the Investing Activities Section of James' Statement of Cash Flows as
a. Zero.
b. $50,000.
c. $100,000.
d. $150,000.

Correct answer: d.

I would like to ask if someone know better this answer....when we have a gain from selling stocks isn't it similar to gain on sale of equipment.
Because when we have gain on sale of equipment, this gain should be in operating cash flow. So why is correct d and not c ?
(i thought 100000 in investing and 50000 in operating)....

------------------------------
Panagiotis Papadopoulos
Controller
Greece
------------------------------

The stock was purchased 3 yeas ago, hence, classified as available for sale investment.  The unrealised gain or loss is disclosed in OCI rather than income statement until they are sold. On the Other hand, property, plant and equipment are recorded at historical cost (except if there is any revaluation) and depreciated over useful life. Depreciation part is charged to income statement on yearly basis already which we show in operating activities as non cash adjustment. Selling PPE is not a routine business and they were not acquired with intention to sell. Therefore, "gain or loss" on sale of PPE is an operating activity rather than investing activity. As far as sale or purchase of stocks are concerned, they are just Cash inflow or Cash outflow in Investing Activities for cash flow purposes.

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Saqib Khattak
Controller
Saudi Industrial Services Company
Jeddah
Saudi Arabia
------------------------------

Original Message:
Sent: 10-26-2020 01:32 PM
From: Carol Sabbag
Subject: Cash Flow Statement - Gain on sale stocks

This is not a part of the normal day to day operations. Only an investment in another company.

------------------------------
Carol Sabbag
Consultant
Norwood MA
United States

Original Message:
Sent: 10-22-2020 09:35 AM
From: Panagiotis Papadopoulos
Subject: Cash Flow Statement - Gain on sale stocks

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock
was sold for $150,000 during the current fiscal year. The result of this transaction should be shown
in the Investing Activities Section of James' Statement of Cash Flows as
a. Zero.
b. $50,000.
c. $100,000.
d. $150,000.

Correct answer: d.

I would like to ask if someone know better this answer....when we have a gain from selling stocks isn't it similar to gain on sale of equipment.
Because when we have gain on sale of equipment, this gain should be in operating cash flow. So why is correct d and not c ?
(i thought 100000 in investing and 50000 in operating)....

------------------------------
Panagiotis Papadopoulos
Controller
Greece
------------------------------