Allison Controls Ltd. follows a policy of paying cash for everything it buys. At the end of 2011 Allison had a balance in its machine account of $90,000 and the associated accumulated depreciation account of $45,000. Similar amounts at the end of 2010 were $100,000 and $50,000 respectively. During 2011 Allison sold a machine for $10,000. It had cost $25,000 and had accumulated depreciation of $10,000 at the time of the sale. How would these amounts appear on the cash flow statement?

Question

Quizplus · Accepted Answer

The sale of the machine would be included in the investing section of the cash flow statement as it is a cash inflow from the sale of a long-term asset. The decrease in the machine account and accumulated depreciation account from 2010 to 2011 would also be included in the investing section as it reflects the sale of a long-term asset. Since Allison pays cash for everything it buys, there would be no cash flows related to financing activities. Therefore, there would be no cash flows from operating activities, and the net effect on cash would be a decrease of $5,000 (net decrease in machine account of $10,000 minus net decrease in accumulated depreciation of $5,000).