- This topic has 1 reply, 2 voices, and was last updated 2 weeks, 2 days ago by Lynn Roden.
- May 1, 2021 at 7:54 am#232432Sohyun KimParticipant
Under indirect method, how do I adjust for trading securities? Is it adjusted like liability accounts?
- May 1, 2021 at 3:01 pm #232445Lynn RodenHOCK international
Hello Sohyun Kim,
Remember that all investing gains and losses, including both realized and unrealized gains and losses, are eliminated in preparing the operating cash flows section of the SCF under the indirect method because they are included in net income but they are not usually a part of operating cash flows.
- Unrealized gains and losses are eliminated because they do not represent cash transactions.
- Realized gains and losses are eliminated because they are normally included on the SCF, along with the cost of the sold security, as cash flows from investing activities.
So eliminating those gains and losses will include eliminating unrealized gains and losses on trading securities as well as realized gains and losses on trading securities that were sold during the period.
However, if cash flows from sales of trading securities are classified as operating activities (for example by a broker-dealer that makes trades for their own account), then any cash flows that result from purchasing or selling trading securities must be included in cash inflows from operating activities on the SCF. That is the adjustment, but it is only done if the company classifies cash flows from purchases and sales of trading securities as cash flows from operating activities..
- Cash flows from sales of trading securities are included as cash inflows from operating activities (the full amount of the cash received, not just the gain or loss on the sale).
- In addition, if cash flows from trading securities are included in operating activities on the SCF, any cash outflows for the purchase of trading securities during the period must be included in cash outflows from operating activities, and not in cash outflows for investing activities.
If you have any other questions, please let me know.
- This reply was modified 2 weeks, 2 days ago by Lynn Roden.
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