Riley Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Riley'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 net income on the income statement 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 net income to net cash provided by operating activities.

Riley Company Reports Its Income from Investments Under the Equity