At the end of the year, a company sold equipment for $30,000 cash. The company paid $110,000 for the equipment several years ago and had recorded accumulated depreciation of $70,000 at the time of its sale. All else equal, the equipment sale will result in the company’s cash flow from: A. investing activities increasing by $30,000. B. investing activities decreasing by $10,000. C. operating activities being $10,000 less than net income. ------------------------------------------------------------------------------ For the most recent year a manufacturing company reports the following items on their income statement: Interest expense $62,500 Loss on disposal of fixed assets $50,000 Realized gain on sale of available-for-sale securities $17,750 Which of the items is classified as an operating item in the company’s income statement? A. Interest expense. B. Loss on disposal of fixed assets. C. Realized gain on sale of available-for-sale securities. Is there an intuitive way to remember these?
A C Answers?
2nd one is B not C.
agree. 2nd is B…also watch out for the usual trick of interest expenses
Should the second one be A. Interest received or paid is an operating activity.
Second should be A, interest expense is a operating activity, PRINCIPAL repayments are financing. This thread now has me confused :[. If there is an intuitive way all of this makes sense i’d love to hear it…
2nd question is definitely not C! I think the answer is B because this is a manufacturing company.
The key for this q is what type of the company. It is manufacturing. Hence a is not the answer gain losses are incidental this leaves us with option. C C is the answer. Please post the answer. Conquistador07
A B - the loss or gain is income from continuing ops on the IS (above the line). On the CF statement, the full cash inflow is reported as an investing activity. Int expense for a manufacturing firm is NON-OPERATING EXPENSE (below the line). On the CF however its an operating activity.
.02 on #2 Yes Interest expense is operating expense but it does depend on whether GAAP or IFRS. But disposal is always operating expense.
What about gain or loss from disposing of a part of the company. Is that operating or nonoperating? Does it make a difference if the part that was disposed of was discontinued or not?
- A - Carrying value was $40 (110 - 70), and you sold the asset for $30. Therefore, you booked a $10 loss on your income statement from a loss on sale of equipment. However, on the Cash Flow Statement, the CFO does not show this loss because it’s PPE, so therefore it’s CFI. So you know automatically that CFO is $10 MORE than Net Income (thereby eliminating C). Because you already paid the $110 in a previous period, the only thing that shows up in Cash Flows from Investing is the $30 cash inflow that you received when you sold the piece of equipment. 2) B - Remember to make the distinction because CFO and “operating activities” on the income statement. This is referring to the latter. An operating activity is anything that relates to the company’s normal course of business. Because this is a manufacturing company, they presumably purchase and dispose of fixed assets on a fairly regular basis, and these fixed assets are what allow them to manufacture their goods. Therefore that’s the only answer that would qualify. Realized gain on avail-for-sale securities would go in Other Comprehensive Income and would just be an adjustment to equity. Interest expense is not an operating item unless it’s a financial services company.
“Realized gain on avail-for-sale securities would go in Other Comprehensive Income and would just be an adjustment to equity.” REALIZED gain on avail for sale hits the IS. Its the UNREALIZED gains that go into other comprehensive.
My mistake. Thanks for the correction there, june. It’s still not an operating item, however.
^^ agreed
brafique Wrote: ------------------------------------------------------- > What about gain or loss from disposing of a part > of the company. Is that operating or nonoperating? > Does it make a difference if the part that was > disposed of was discontinued or not? Any thoughts on this?
So what is Realized gain on AFS securities then if its not operating?
non-operating…below the EBIT line (maybe in “other income”)??
Thanks billy22g… I meant CFO but not relevant here as the qn specifically talks about “operating items on income statement”. Yes interest is a non-operating item from that regard. And prb so it tax …hence EBIT.
Sorry for the delay. Yes A and B are correct