Question

Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary and the indirect method is used.

(a) Purchase of equipment.

(b) Proceeds from sale of building. 

(c) Redemption of bonds. 

(d) Depreciation.

(e) Payment of dividends.

(f) Issuance of common stock.

 

 

Answer 1

Cash flow statement is said to be the financial statement which provides the aggregate date about both the cash inflows and the outflows of the firm. It is mainly focused on the cash accounting that has two forms such as accrual and the cash. There are three activities in the cash flow. They are as follows:

• Operating activities.

• Investing activities.

• Financing activities.

 

Explanation: 

It is mentioned to categorize the operating, investing or financing activities. Thus, in the preparation of the cash flow statement, the operating activities will be present in the first section which records all the operational activities of the business.

 

In the second section, the investing activities will be recorded. Thus, it records the cash that is spent on the plant, equipment, and the property.

 

In the third section, the financing activities will be recorded. It gives the overview of the cash that is used for financing the business.

 

The following table shows the classification of items:

 

Explanation

The following explanation provides an understanding about the classification of items as operating, investing and financing activities:

• Purchase of equipment – It is the amount spent of purchasing an asset as an investment in business. It is a cash outflow and should be reported in the investing activities section as a deduction.

• Proceeds from sale of a building – It is the amount received from sale of a building. It is a cash inflow and should be reported in the investing activities section as an addition.

• Redemption of bonds – It is the amount paid to clear the outstanding liability of bonds that was raised to finance the business. It is a cash outflow and should be shown as deduction in the financing activities section.

• Depreciation – It is non-cash expenditure which was deducted as an expense in the income statement to arrive the net income. In order to derive the true net income, this non-cash expenditure should be added back to the net income in the operating activities section.

• Payment of dividends – It the amount paid in cash to the finance providers for their investment in the business. It is a cash outflow and should be shown as deduction in the financing activities section.

• Issuance of common stock – It is the amount raised in cash through issue of common stock shares. It is a cash inflow and should be shown as addition in the financing activities section.

Cash flow statement is said to be the financial statement which provides the aggregate date about both the cash inflows and the outflows of the firm.