A firm sold an investment in securities available for sale 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 in the statement of cash flows prepared under the direct method,assuming this is the only investment in securities available for sale?
A) $28,000 investing cash inflow;add $33,000 in the reconciliation of earnings and net operating cash flow
B) $28,000 investing cash inflow;add $2,000 in the reconciliation of earnings and net operating cash inflow
C) $28,000 investing cash inflow;add $5,000 in the reconciliation of earnings and net operating cash inflow
D) Add $5,000 in the reconciliation of earnings and net operating cash flow.

Question

Quizplus · Accepted Answer

The sale of the investment results in a cash inflow of $28,000, which should be reported as an investing activity in the statement of cash flows. The valuation allowance of $3,000 is a noncash item that needs to be added back in the reconciliation of earnings and net operating cash inflow. Since the investment was sold for $2,000 less than its original cost, there is a $2,000 loss that needs to be added back as well. Therefore, the correct entry would be:

Cash flows from investing activities: 
Sale of securities available for sale $28,000

Reconciliation of earnings and net operating cash inflow: 
Add: Valuation allowance $3,000 
Add: Loss on sale of securities available for sale $2,000

A Firm Sold an Investment in Securities Available for Sale