Problem 10 - Accounting

Question

An analysis of the general ledger accounts indicates that delivery equipment, which cost \(\$ 96,000\) and on which accumulated depreciation totaled \(\$ 42,100\) on the date of sale, was sold for \(\$ 46,500\) during the year. Using this information, indicate the items to be reported on the statement of cash flows.

Step-by-Step Solution

Answer

Report \$46,500 as cash inflow under investing activities and add back \$7,400 loss in operating activities.

Step 1: Identify Cash Inflow from Sale

The first step is to identify the cash inflow from the sale of the delivery equipment, which is the amount the equipment was sold for. Here, the cash received from the sale is the selling price, \( \$ 46,500 \). This amount will be reported as a cash inflow in the investing activities section of the statement of cash flows.

Step 2: Calculate Book Value of Sold Equipment

Calculate the book value of the delivery equipment at the time of sale. This is done by subtracting the accumulated depreciation from the original cost of the equipment.\[\text{Book Value} = \text{Original Cost} - \text{Accumulated Depreciation} = \\(96,000 - \\)42,100 = \$53,900\]

Step 3: Determine Gain or Loss on Sale

Determine if there was a gain or loss on the sale by comparing the cash received (selling price) with the book value. Calculate the gain or loss using the formula: \\text{Gain or Loss} = \text{Cash Received} - \text{Book Value} = \\(46,500 - \\)53,900 = -\\(7,400\Since the result is negative, this indicates a loss of \( \\)7,400 \) on the sale of the equipment.

Step 4: Impact of Gain/Loss on Income Statement

The determined loss of \( \$7,400 \) is reported on the income statement. However, when preparing the cash flow statement using the indirect method, this loss is added back to net income under the operating activities section, as it is a non-cash item.

Step 5: Final Items for Cash Flows Statement

Summing up, the key items to report on the statement of cash flows are:1. \( \\(46,500 \) as cash inflow from investing activities (proceeds from sale).2. Loss of \( \\)7,400 \) is added back in operating activities (adjustment to reconcile net income).

Key Concepts

Understanding Cash Inflow

In the context of a statement of cash flows, cash inflow refers to the money received by a business from various activities. For this exercise, we're focusing on cash inflow from investing activities. When a company sells an asset, such as delivery equipment, the cash received is considered a cash inflow. In the exercise, the delivery equipment was sold for \( \\( 46,500 \).
This amount will appear in the investing activities section of the cash flow statement.

• Investing activities typically include the sale of long-term assets, like equipment.
• The \( \\) 46,500 \) represents the proceeds from the sale, indicating money coming into the company.
• Cash inflows from sales of equipment are crucial as they contribute to the company's financial health by providing liquid cash.

Separation of cash flows into categories helps in evaluating the cash generating ability of a company's core operations versus its investment activities.

What is Book Value?

The book value of an asset is an accounting term that refers to the original cost of the asset minus accumulated depreciation. It represents the net value of the asset that is left on the books. In this exercise, the delivery equipment's original cost was \( \\( 96,000 \), and its accumulated depreciation was \( \\) 42,100 \) at the time of sale. Thus, its book value was calculated as \( \\( 96,000 - \\) 42,100 = \$ 53,900 \).
This value is important because it is used to assess the gain or loss when the asset is sold.

• Original cost encompasses the price paid for the asset plus any additional fees related to acquiring the asset.
• Accumulated depreciation reflects how much of the asset's initial value has been used up or expired over time.
• Book value provides a benchmark against which sale proceeds are compared to determine financial gain or loss.

Overall, understanding the book value is essential for accurate financial reporting and making informed asset disposal decisions.

Gain or Loss on Sale: Determining Financial Impact

When an asset is sold, calculating whether there is a gain or loss is a key financial analysis task. It involves comparing the sale proceeds to the book value. In the given scenario, the cash received from the sale of the delivery equipment was \( \\( 46,500 \), while its book value was \( \\) 53,900 \). This resulted in a loss calculated by subtracting the book value from the selling price, i.e., \( \\( 46,500 - \\) 53,900 = -\\( 7,400 \). This indicates a loss of \( \\) 7,400 \), as the proceeds were less than the book value.

• A positive result indicates a gain, meaning more money was made than the asset was worth on the books.
• A negative result, as in this exercise, indicates a loss, which signifies financial decline with respect to the asset.
• Gains or losses impact the financial statements. Gains add to income, while losses need reconciliation on the cash flow statement.

Understanding gain or loss is vital, as it impacts how a company's net income is adjusted on the statement of cash flows, particularly when using the indirect method.