CMA Part 1 Q&A – Available for Sale Securities Cash Flow Statements

CMA Exam Questions - available for sale securities

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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Until our next lesson,
Nathan Liao Signature

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2 Comments on “CMA Part 1 Q&A – Available for Sale Securities Cash Flow Statements”

  1. 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).

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