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Chapter 14: Q8RQ (page 768)

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Short Answer

Expert verified

Answer

Any loss on disposal of long-term assets should be added back to the net income in the operating activities section of the statement of cash when using indirect method.

Step by step solution

01

Loss on disposal of long-term assets

If there is a loss on disposal of long-term assets then such loss is debited to the statement of profit and loss accountwhich means net income is reduced by loss amount.

02

Loss on disposal of long-term assets should be added back to the net income

Sale of long-term asset is an investing activity hence it should be adjusted under the heading cash flows from investing activity. Therefore, loss on disposal of long-term assets is added back to the net income in the operating activities section of the statement of cash flows when using direct method.

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Most popular questions from this chapter

Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.
    Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.

Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows

The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the following:

2018 2017 Current Assets: Cash \( 83,900 \) 20,500 Accounts Receivable 14,500 21,800 Merchandise Inventory 61,800 60,400 Current Liabilities: Accounts Payable 29,600 28,100 Accrued Liabilities 10,500 11,900 Robeson’s transactions during 2018 included the following:

Payment of cash dividends \( 21,200

Depreciation expense \) 17,400

Purchase of equipment with cash 54,400

Purchase of building with cash 103,000

Issuance of long-term notes payable to borrow cash 44,000

Net income 63,600

Issuance of common stock for cash 111,000

Requirements

1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.

2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.

3. If Robeson plans similar activity for 2018, what is its expected free cash flow?

Computing cash flows for investing and financing activities Consider the following facts for Java Jolt:

  1. Beginning and ending Retained Earnings are \(45,000 and \)70,000, respectively. Net income for the period is \(60,000.
  2. Beginning and ending Plant Assets are \)124,500 and \(134,500, respectively.
  3. Beginning and ending Accumulated Depreciation—Plant Assets are \)21,500 and \(26,500, respectively.
  4. Depreciation Expense for the period is \)17,000, and acquisitions of new plant assets total \(29,000. Plant assets were sold at a \)5,000 gain. Requirements 1. How much are cash dividends? 2. What was the amount of the cash receipt from the sale of plant assets?

Using a spreadsheet to prepare the statement of cash flows— indirect method The 2018 comparative balance sheet and income statement of Attleboro Group, Inc. follow. Attleboro disposed of a plant asset at book value in 2018.

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)13,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.
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