Question

TOPIC 1: Companies are required to classify cash flows as operating, investing, or financing. Which of these three categories do you think will most likely have a net cash outflow over a number of years? Explain your answer.

TOPIC 2: Which method of preparing the Operating Activities section of the statement of cash flows, the direct or the indirect method, do you believe provides more information to users of the statement? Explain your answer.

Answer 1

Answer: Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.

• Operating activities include cash activities related to net income. For instance, money produced from the offer of products (income) and money paid for stock (cost) are working exercises since incomes and costs are incorporated into net gain.
• Investing activities include cash activities related to noncurrent assets. Noncurrent resources incorporate (1) long haul speculations; (2) property, plant, and hardware; and (3) the primary measure of credits made to different elements. For instance, money produced from the offer of land and money paid for an interest in another organization are incorporated into this classification. (Note that interest received from loans is included in operating activities.)
• Financing activities include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and proprietors' value things incorporate (1) the essential measure of long haul obligation, (2) stock deals and repurchases, and (3) profit installments. (Note that intrigue paid on long haul obligation is incorporated into working exercises.)