A company sold an investment in trading securities originally costing $30,000, for $28,000. At the beginning of the year, the investment had a valuation allowance of $3,000, debit. What is the correct disclosure for these events on the statement of cash flows prepared under the direct method, assuming that this is the only investment in trading securities?
A) $28,000 operating cash inflow; add $33,000 in the reconciliation of earnings and net operating cash flow
B) $28,000 operating cash inflow
C) $28,000 operating cash inflow; add $5,000 in the reconciliation of earnings and net operating cash flow
D) Add $5,000 in the reconciliation of earnings and net operating cash flow.

Question

Quizplus · Accepted Answer

Under the direct method, the sale of trading securities is reported as an operating cash inflow in the operating activities section. The cost of the investment is not relevant for the cash flows, only the proceeds received. Therefore, the operating cash inflow is $28,000.
However, the valuation allowance of $3,000, debit, needs to be added back to reconcile earnings to net operating cash flow. In addition, the loss of $2,000 ($28,000 proceeds - $30,000 cost) also needs to be added back. Therefore, the total adjustment to reconcile earnings to net operating cash flow is $5,000 ($3,000 + $2,000). The correct disclosure is thus $28,000 operating cash inflow; add $33,000 in the reconciliation of earnings and net operating cash flow.

A Company Sold an Investment in Trading Securities Originally Costing