CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

A company recognized an unrealized gain of $15,000 on a trading security. This would be reflected on the cash flow statement as:
A. an increase in investing cash flows.
B. a decrease in investing cash flows.
C. a deduction from operating cash flows.
Explanation: The unrealized gain would be included in net income but it is a noncash event. Therefore, it would be deducted from operating cash flows. Only the actual purchase or sale of investments would be an investing activity.

User Contributed Comments 7

User Comment
shasha unrealized: not actual; non-cash movement.
Pooh Why would unrealized gain be included in net income? Can someone clarify? Maybe I should check the structure of the net income statement.
Cata Unrealized gain mean an revenue which is recorded as an estimate (no cash payment was received/no sale was made, it only an increase of value due to increase in the market price)....as it is recorded as a revenue, it is added up to net income of the period.
cbb1 Unrealized gains/losses on trading securities are recorded on the income statement. Unrealized gains/losses of available for sale securities are recorded directly to equity via Other Comprehensive Income (OCI).
Rotigga Great question.
rhardin Why are unrealized gains affecting the cash flows at all? I don't understand why we should be deducting from cash flows when this is a non-cash event.
pikusa rhardin: unrealized gain increases net income. Net income is a part of operating cash flow. Since we are interested in only cash part, non cash elements should be deducted from net income in order to arrive at operating cash flow.
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