Question

Which of the following would be classified as a financing activity on the statement of cash flows?

A. Paying cash dividends.

B. Paying interest on a long-term note.

C. Issuing long-term notes for plant assets.

D. Purchasing machinery with cash

Answer 1

Correct Answer : A

Paying Cash Dividends to Shareholders would be a Financing Activity.

Just to brush up :

Financing activities include repayment of short-term loans and/or long-term loans, the retirement of bonds payable, the purchase of a company's own stock, the declaration and payment of dividends, and other decreases in long-term liabilities and stockholders' equity.

Then why are others wrong :

Lets understand,

B) Paying interest on a long term note would go to the profit & loss account / income Statement as an Expense and would be treated as an OPERATING ACTIVITY.

C) Issuing Long Term Notes for plants assets : My Friends there is No Cash Flow here its a non cash transaction (to understand it may also be called as barter), But remember, had only Notes been issued for cash then we would treat it as a Financing Activity or for that matter only plant would have been purchased for cash we would put it in Investing Activity.

D) Machinery for Cash is a plain vanilla Investing Activity. No Confusion

Hope that helps!