CMA Exam Part 1 Q&A – Operating Investing and Financing Activities

CMA Exam Questions - difference between covariance and correlation

Student Question

“My toughest area so far is the statement of cash flows. Classifying what is in operating, investing, and financing.

For example, if i purchased a building for $100,000 (investing cash outflow) and later down the road, I sell it for $110,000. Would i put all $110,000 in investing cash inflow or would I breakout $10,000 gain into operating and $100,000 in investing.

Things like this is what are confusing me…

Thanks in advance for your help!
Best,
Chris”

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On January 1, 2016, the company purchased a building worth $100,000 for cash.
The building has an estimated useful life of 5 years and salvage value of $10,000.
On January 1, 2018, the company sold the equipment for $110,000.

  Journal Entry   DEBIT   CREDIT Effect on the Statement of Cash Flows
1 Jan 16
 Building   100,000 No effect
Cash   100,000 Cash outflows from investing activities
31 Dec 16
Depreciation Expense   18,000 No effect
Accumulated Depreciation-Building   18,000 No effect
31 Dec 17
Depreciation Expense   18,000 No effect
Accumulated Depreciation-Building   18,000 No effect
1 Jan 18
Cash   110,000 Cash inflows from investing activities
Accumulated Depreciation-Building   36,000 No effect
Building   100,000 No effect
Gain on Sale   46,000 No effect

Note that only cash transactions affect the statement of cash flows and nothing more. Gain from sale of fixed assets does not affect the statement of cash flows in any way.

Why depreciation and amortization expense are added back and gain on sale of land is deducted to net income under the indirect method of cash flow preparation?

We add back depreciation expense in net income under the indirect method of cash flow preparation because we have previously deducted it in net income. Depreciation and amortization expense are noncash expenses and therefore is not included in the statement of cash flows.

We need to deduct the gain on sale in net income under the indirect method of cash flow preparation because we have previously added in it net income.


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Until our next lesson,

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