IZ Corporation purchased land for $425,000. Later in the year, the company sold a different piece of land with a book value of $225,000 for $270,000.

Question

How are the effects of these transactions reported on the statement of cash flows assuming the indirect method is used? Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required. If a transaction has no effect on the statement of cash flows, select "No effect" from the drop down menu and leave the amount box blank.

Transactions Action Amount
Gain on sale of land
$fill in the blank 2
Cash received from sale of land
$fill in the blank 4
Cash paid for purchase of land

Answer 1

To report the effects of the transactions on the statement of cash flows using the indirect method, we need to analyze each transaction.

1. Gain on sale of land: The gain on sale of land is the difference between the selling price and the book value. In this case, the selling price is $270,000 and the book value is $225,000, which gives a gain of $45,000. This gain will be subtracted from net income in the operating activities section of the cash flow statement because it was included in net income but did not involve cash.

   • Gain on sale of land:
     Action: Adjustment
     Amount: -$45,000

2. Cash received from sale of land: This reflects the cash inflow from the sale of the land. The company received $270,000 when selling the land.

   • Cash received from sale of land:
     Action: Cash inflow
     Amount: $270,000

3. Cash paid for purchase of land:
   This transaction is a cash outflow for the purchase of new land, which amounted to $425,000.

   • Cash paid for purchase of land:
     Action: Cash outflow
     Amount: -$425,000

Putting it all together:

Summary of Transactions for the Statement of Cash Flows

1. Gain on sale of land
   Action: Adjustment
   Amount: -$45,000

2. Cash received from sale of land
   Action: Cash inflow
   Amount: $270,000

3. Cash paid for purchase of land
   Action: Cash outflow
   Amount: -$425,000

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