![]() On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as Gain on Sale of Plant Assets. Propensity’s income statement for the year 2018 includes a gain on sale of land, in the amount of $4,800, so a reversal is accomplished by subtracting the gain from net income. ![]() A gain is subtracted from net income and a loss is added to net income to reconcile to cash from operating activities. Because the disposition gain or loss is not related to normal operations, the adjustment needed to arrive at cash flow from operating activities is a reversal of any gains or losses that are included in the net income total. Gains and/or losses on the disposal of long-term assets are included in the calculation of net income, but cash obtained from disposing of long-term assets is a cash flow from an investing activity. Reverse the Effect of Gains and/or Losses On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as an adjustment to reconcile net income to net cash flow from operating activities. The sole noncash expense on Propensity Company’s income statement, which must be added back, is the depreciation expense of $14,400. To reconcile net income to cash flow from operating activities, these noncash items must be added back, because no cash was expended relating to that expense. Net income includes deductions for noncash expenses. On Propensity’s statement of cash flows, this amount is shown in the Cash Flows from Operating Activities section as Net Income. The net income on the Propensity Company income statement for December 31, 2018, is $4,340. The operating activities cash flow is based on the company’s net income, with adjustments for items that affect cash differently than they affect net income.
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