Doff Manufacturing Co. sold equipment that cost $13,300 and accumulated depreciation of $11,000 for $3,000 cash. How is the Cash Flows from Operating Activities affected?

Question

Quizplus · Accepted Answer

When an asset is sold, the difference between the selling price and the book value (cost minus accumulated depreciation) is either a gain or a loss, depending on whether the selling price is higher or lower than the book value. In this case, the selling price of $3,000 is lower than the book value of $2,300 ($13,300 - $11,000), so the difference is a gain of $700 ($3,000 - $2,300). However, this gain is not part of the company's core operating activities (i.e. selling products, paying creditors, etc.), so it is deducted from Net Income in the Cash Flows from Operating Activities section of the cash flow statement. The $3,000 cash received from the sale is part of the Operating Activities section, but it is not added to Net Income - it is simply reported as a cash inflow. Therefore, option B is the correct answer.