Student Question
“Can you please explain why the gain from available for sale securities is subtracted in this problem?
I would think it would be a cash inflow?”
– Anna
Test Bank Question:
Selected financial information for Kristina Company for the year just ended is shown below:
| Net income | $2,000,000 |
| Increase in accounts receivable | 300,000 |
| Decrease in inventory | 100,000 |
| Increase in accounts payable | 200,000 |
| Depreciation expense | 400,000 |
| Gain on the sale of available-for-sale securities | 700,000 |
| Cash received from the issue of common stock | 800,000 |
| Cash paid for dividends | 80,000 |
| Cash paid for the acquisition of land | 1,500,000 |
| Cash received from the sale of available-for-sale securities | 2,800,000 |
Assuming that the indirect method is used. What is Kristina’s cash flow from operating activities for the year?
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LOS: P1A1.e identify how various financial transactions affect the elements of each of the financial statements and determine the proper classification of the transaction.
The gain on the sale of available-for-sale securities is subtracted from net income because net income includes the gain-on-sale from available-for-sale securities.
For a simple illustration:
| Income from Operations | xxx | ||
| Add: Gain on Sale of Available for Sale Securities | xxx | ||
| Earnings before Tax | xxx | ||
| Less: Income Tax | xxx | ||
| Net Income | xxx | ||
To understand this further, let us examine the entry when the available-for-security is sold at a gain:
| DEBIT | CREDIT | Treatment | ||||
| Cash | $2,800,000 | Reported as cash from investing activities | ||||
| Avaiable for sale securities | $2,100,000 | |||||
| Gain on Sale | $700,000 | Included in the computation of net income | ||||
The gain (or loss) on sale of available for sale securities must be subtracted (or added) from the net income as it is not part of operating activities but for financial statement preparation, these are included in the computation of net income.
The gain on sale is a portion of the cash inflow from investing activities.
Therefore, the net cash flow from operating activities using the indirect method will be:
| Net Income | 2000000 | ||
| Add: Depreciation | 400,000 | ||
| Add: Decrease in Inventory | 100,000 | ||
| Add: Increase in AP | 200,000 | ||
| Less: Increase in AR | 300,000 | ||
| Less: Gain on Sale of Available for Sale Securities | 700,000 | ||
| Net Cash Flow from Operating Activities | 1,700,000 | ||
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2 Comments on “CMA Part 1 Q&A – Available for Sale Securities Cash Flow Statements”
Can You please clarifiy the below
According to you it is not operating hence has to be substracted from Net income But it is Inflow to investing activites.
But below answer as per Gleim showns that, they excluded to derive cash flow from investing activities.
Question: 29 Kristina’s cash flow from investing activities for the year is
A. $(1,500,000)
B. $1,220,000
C. $1,300,000
Answer (C) is correct.
Cash flows from investing activities for the year include the $2,800,000 inflow from the sale of available-for-sale securities and the $1,500,000 cash outflow for the purchase of land ($2,800,000 − $1,500,000 = $1,300,000 net cash inflow).
Prakash, check out this illustration: