Question

EASY ACCOUNTING SHORT ANSWER:

1) Explain the difference between cash dividends and an operating expense and why they will have the same effect on stockholder's equity section (reducting the balance). Please explain with depth and clarity.

2) Distinguish and explain among the three types of activities reported in the statement of Cash Flows (inflows and outflows examples of each of the three types of activities)

Answer 1

1) Cash dividends are not part of company's operating expense. They are not actually expense and do not form part of company's income statement. Rather they are part of Retained Earnings .

Operating expenses are those expenses which are incurred for carrying out the operations in an enterprise but they are not directly realted to production. E.g Rent, depreciation, payroll etc.

Effect on stockholders eqyuity: With increase in expenses there is reduction in stockholders equity and with increase in revenue there is increase in stockholders equity, this is clearly justified by the link in balance sheet and income statement. Whereas while paying cash dividends (it reduces the retained earning balance) which is part of stockholders equity. Thus paying of cash dividend will eventually lead to reduction in equity balance. In both the cases though cash dividend is not operating expense , both have same effect on equity balance.

2) Three types of activities that are reported in cash flow are: operating, investing and financing.

Operating activity: These are those activities which affect the net income of the company. These activities are related to day-to-day operations of enterprise. Examples of operating activities are: sale of goods, purchase of merchandise, income taxes paid, payroll expenses etc.

Investing activity: Investing activities are those activities which affect the non-current assets balance. It includes cash position from gains/losses from investments and investment in capital assets. Examples of investing activities are: sale of equipment, purchase of land and building, purchase of investment instruments etc

Financing activities: transactions which are used to fund company operations or expansions. Raising of funds for capital and repayment of debts, investors are part of financing activities.

E.g. sale of shares, repayment of debt, bonds

Repurchase of company stock etc.

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