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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Land transactions on the statement of cash flows

IZ Corporation purchased land for $400.000. Later in the year, the company sold a different piece of land with a book value of $200,000 for $240,000. How are the effects of these transactions reported on the statement of cash flows?

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Cash flows from operating activities: These are the cash produced by the normal business operations.

Indirect method: Under this method, the following amounts are to be adjusted from the Net Incometo calculate the net cash provided from operating activities.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)
Add: Decrease in current assets
         Increase in current liability
         Depreciation expense and amortization expense
         Loss on sale of plant assets
Deduct: Increase in current assets
              Decrease in current liabilities
              Gain on sale of plant assets
Net cash provided from or used by operating activities

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

The below table shows the way of calculation of cash flows from investing activities:

Cash flows from investing activities
Add: Proceeds from sale of fixed assets
         Sale of marketable securities / investments
         Interest received
         Dividend received
Deduct: Purchase of fixed assets/long-lived assets
              Purchase of marketable securities
Net cash provided from or used by investing activities

To Explain: The effect of the given transactions reported on the statement of cash flows.

Explanation

  • The purchase of land worth of $400,000 will be reported on the investing activities section of the statement of cash flows as an outflow of cash.
  • Gain on sale of land ($40,000) will be reported on the operating activities section of the statement of cash flows.
  • Cash received from sale of land ($240,000) will be reported on the investing activities section of the statement of cash flows as an inflow of cash.

Working notes:

Calculate the amount of gain on sale of land:

Gain on salex

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