Question

Choose Operating, Investing, Financing activities, or None for the following statements

1.Cash settlement of a long-term note payable

2.Sale of PP&E for cash

3.Repurchase of the treasury stock using cash

4.Purchase of patent in exchange for a long-term note payable

5.Increase in accounts receivable

Answer 1

Answer:

Operating activities are the principal revenue-producing activities of an entity & other ancillary activities that are not investing or financing activities. For example, cash paid to the supplier, cash paid to employees, etc.

Investing activities are the acquisition & disposal of long term assets & investments that are not included in cash & cash equivalents. Investing activities. For example acquisition or disposal of fixed assets, long term investments, etc.

Financing activities are the activities that result in changes in the size & composition of the owner's capital & borrowing of an entity. for example, Repayment of loan, issue of common stock, etc.

Therefore,

1. Cash settlement of a long term note payable is classified as cash flow from financing activities.

2. The sale of PP&E for cash is classified as cash flow from investing activities.

3. The repurchase of treasury stock using cash should be classified as cash flow from financing activities.

4. Purchase of patent in exchange for a long term note payable does not involve cash inflow or outflow to the organization & hence it does not consider in any section of cash flow statement.

5. An increase in accounts receivable represents the customers to whom credit sales are made have not paid yet & accordingly, the organization would not receive the cash & the same is represent use of cash as well & hence it should be adjusted in net income in cash flow from operating activities section. accordingly, increase in accounts receivable is shown in cash flow from operating activities.