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MBA iQ Question of the Week: June 25, 2021

Jun 25th 2021

Welcome to the weekly #WhatsYourMBAiQ question. At MBA iQ, we help aspiring MBAs reach their potential by accelerating MBA readiness. This week, we're asking you to pull out your accounting hat.

Companies buy and sell equipment all the time. Sometimes they incur gains and other times they incur losses. This question helps you understand the relationship between book value and gain/loss and how they are illustrated in a Statement of Cash Flows, one of the primary Financial Statements.

Question

If a loss of $20,000 is incurred in selling (for cash) office equipment having a book value of $45,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is:

a. $45,000
b. $25,000
c. $65,000
d. $20,000

Answer & Explanation

Choice (b) is the correct answer. Cash flows from investing activities normally arise from selling fixed assets, investments, and intangible assets, which are all types of assets. Examples of fixed assets include land, buildings, and equipment. Investments include stocks, bonds, mutual funds, etc. Intangible assets include trademarks, copyrights, and brand equity.

In the Statement of Cash Flows, cash inflows are listed followed by cash outflows. Here, the book value of $45,000 should be reduced by the loss of $20,000 resulting in cash flow of $25,000.

An equation would look like:

Cash Inflows from Sale = Book Value - Loss

Cash Inflows from Sale = $45,000 Book Value - $20,000 Loss

Cash Inflows from Sale = $25,000 This means that the equipment sold for less (loss) than it's worth (book value).

In most MBA accounting classes, you'll learn various financial terms, such as book value, cash flows, and financial statements.

If you're looking to expand your knowledge further, check out MBA iQ's multi-modular online learning solution that covers core business knowledge, analytical skills and other topics crucial for MBA success. Our best-in-class modules provide the tools to strengthen foundational knowledge so students can hit the ground running on Day 1 of a rigorous MBA program. MBA iQ lays the foundation upon which you can build in B school and helps you to discover and mitigate against those blind spots before you start.

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