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Mars
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| Posted: 20 Apr 2011 at 17:22 | IP Logged
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This question is from Wiley:
Jackson Company classifies trading securities as an operating activity based on their nature and purpose. In a statement of cash flows in which the operating activities section is prepared under the indirect method, the realized gain on an investment in securities held for trading should be presented as a(n)
A. Deduction from net income in the amount of the gain.
B. Addition to net income in the amount of the securities’ fair value at the beginning of the period.
C. Cash inflow from investing activities.
D. Both A and C.
Anyone understands ???
Answer B is correct. Per ASC Topic 230, cash inflows and outflows from trading securities may be included in either operating or investing activities, based on the nature and purpose of the securities. Unrealized gains and losses on trading securities should be included in current income. Therefore, trading securities are carried at fair value and the amount of realized gain on the sale is the difference between the securities' fair value at the beginning of the period and the amount of appreciation to the date of sale. Net income is the starting point when preparing the operating activities section of a statement of cash flows using the indirect method. Since the realized gain on sale is already included as a component of net income, only the fair value (carrying amount) of the securities at the beginning of the period must be added to net income. The total cash inflow from the sale (carrying amount plus realized gain) will then be included in operating activities.
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Mars
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| Posted: 24 Apr 2011 at 11:32 | IP Logged
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Anyone ??
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GVen
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| Posted: 25 Apr 2011 at 09:44 | IP Logged
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(deleting prior post as Zeratul's explanation was correct)
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Zeratul
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| Posted: 25 Apr 2011 at 12:31 | IP Logged
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Almost. The statement of cash flows is most interested in actual cash flows, not gains/losses. You sold the asset for 15, so even though for accrual purposes you only gained 3 since the beginning of the year (the original value is irrelevant in this case since trading securities are marked-to-market at the beginning of the year), for the purposes of the cash flow statement, your only interest is the cash you actually received.
The indirect method reconciles net income to cash flows provided or used by operating activities. Accordingly, net income should have a gain of $3:
Cash DR 15
Trading Securities CR 12 (Carrying value after FV adjustment)
Gain on Sale of Trading Securities CR 3
A $12 adjustment will therefore be made for the carrying value of the trading security in order to reconcile the income ($3) with the cash received ($15).
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Mars
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| Posted: 30 Apr 2011 at 08:53 | IP Logged
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Thanks Zeratul
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Topic: Trading securities in Cash flows stat.
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