Question

8. Selected transactions of Staples Company are listed on the exam “answer page”.      

     

INSTRUCTIONS

Classify each transaction as either a(n)operating activity, investing activity, financing activity, or non-cash investing and financing activity by placing in X in the appropriate column.

Answer 1

transactions can be classified in different types,Operating activities are the functions of a business directly related to providing its goods and/or services to the market. These are the company's core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide the majority of a company’s cash flow and largely determine whether it is profitable. Some common operating activities include cash receipts from goods sold, payments to employees, taxes, and payments to suppliers. These activities can be found on a company's financial statements, and in particular the income statement and cash flow statement.

What are 'Operating Activities'

Operating activities are the functions of a business directly related to providing its goods and/or services to the market. These are the company's core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide the majority of a company’s cash flow and largely determine whether it is profitable. Some common operating activities include cash receipts from goods sold, payments to employees, taxes, and payments to suppliers. These activities can be found on a company's financial statements, and in particular the income statement and cash flow statement.

Operating activities are distinguished from investing or financing activities, which are functions of a company not directly related to the provision of goods and services. Instead, financing and investing activities help the company function optimally over the longer term. This means that the issuance of stock or bonds by a company are not counted as operating activities.

Investing activities are identified with changes in a corporation's long-term assets. Investing activities are reported in a separate section of the financial statement Statement of Cash Flows

Examples of investing activities include the acquisition (purchase) of long-term investments, equipment used in the business, a building used in the business, and so on. The purchase of these long-term assets is shown as a negative amount in the investing activities section of the SCF, because the acquisition will use (will reduce) cash.

Investing activities also include the sale of long-term investments and the sale of long-term assets that had been used in the business. The proceeds (money received) from the sale of long-term assets will also be reported in the investing activities section of the cash flow statement. The money received will appear as a positive amount, since the effect on cash is positive. The sale is providing or increasing the company's cash.

Financing activities are transactions or business events that affect long-term liabilities and equity. In other words, financing activities are transactions with creditors or investors used to fund either company operations or expansions. These transactions are the third set of cash activities displayed on the statement of cash flows.

Financing activities include both cash inflows and outflows from creditors and investors. Cash inflows from creditors usually consist of new loans issued to the company, while cash outflows from creditors include loan and interest payments. Issuances of bonds and bond payments are also consisted financing activities.

Cash inflows from investors occur from newly issued stock or contributions from partners; whereas, cash outflows from investors consist of dividends and owner distributions.

Not all financing activities affect cash, however. Some projects are financed directly. Take a company building a new building for example. If the building is completely financed by a mortgage, the cash account is never changed. The liability account is increased and the building account is increased.

Some examples of non-cash investing and financing activities that may become significant for the users of financial statements are given below:

1. Issuance of stock to retire a debt
2. Purchase of an asset by issuing stock, bonds or a note payable.
3. Exchange of non-cash assets.
4. Conversion of debt to common stock.
5. Conversion of preferred to common stock