Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows (indirect method), the $25,000 should
A) not be shown.
B) be shown as cash inflow from investing activities.
C) be shown as cash outflow from financing activities.
D) be shown as a deduction from net income in the cash flows from operating activities section.

Question

Quizplus · Accepted Answer

Under the equity method, income recognized from an investment increases the investor's net income but does not affect cash if no dividends are received. Therefore, on the statement of cash flows prepared using the indirect method, this non-cash income must be deducted from net income to reconcile it to net cash provided by operating activities.

Dolan Company Reports Its Income from Investments Under the Equity