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?

Question

Quizplus · Accepted Answer

Under the direct method of preparing the statement of cash flows, the sale of an investment in securities available for sale would be reported as an investing cash inflow. The proceeds from the sale of $28,000 would be reflected as such. However, the original cost of $30,000 and the valuation allowance of $3,000 would need to be reconciled in the section on the reconciliation of earnings and net operating cash inflow. Since the sale price is less than the original cost, the allowance for the valuation of the securities is relevant and reduces the amount of the loss incurred on the sale. Therefore, the correct entry would be to add back the valuation allowance of $3,000 to the $2,000 loss incurred on the sale, resulting in a net decrease of $5,000 in the reconciliation of earnings and net operating cash inflow. Hence, the correct choice is B.

A Firm Sold an Investment in Securities Available for Sale