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.
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:
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.
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