In the trading-securities scenario, what is the effect on the cash flow statement?

In the trading-securities scenario, what is the effect on the cash flow statement?

• A. Cash flow increases by 6
• B. Cash flow decreases by 4
• C. Cash flow increases by 10
• D. No change in cash

Answer: (B)

In trading securities, changes in fair value flow through net income, not directly through cash. The cash flow statement only reflects actual cash receipts and payments from buying or selling those securities, which appear in investing activities. Unrealized gains or losses don’t by themselves change cash, because they’re non-cash adjustments to income. If the scenario results in a net cash outflow from trading securities (for example, more cash was paid to acquire securities than was received from sales), the investing activities section would show a decrease in cash. A net decrease of 4 means the cash spent on purchases exceeded cash received from sales by 4, so cash flows decline by 4.

In trading securities, changes in fair value flow through net income, not directly through cash. The cash flow statement only reflects actual cash receipts and payments from buying or selling those securities, which appear in investing activities. Unrealized gains or losses don’t by themselves change cash, because they’re non-cash adjustments to income.

If the scenario results in a net cash outflow from trading securities (for example, more cash was paid to acquire securities than was received from sales), the investing activities section would show a decrease in cash. A net decrease of 4 means the cash spent on purchases exceeded cash received from sales by 4, so cash flows decline by 4.