Question

In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be?

A. operating activity
B. investing activity
C. financing activity
D. Investing activity

Answer 1

In a statement of cash flows, the sale of treasury stock at a value above cost is considered a financing activity. This is because it pertains to equity transactions and the raising of capital. The choice between borrowing funds and issuing stock for expansion involves trade-offs in control versus obligations.

Step-by-step explanation:

The sale of treasury stock at an amount greater than cost in preparing a statement of cash flows would be classified as a financing activity. This is because transactions involving equity, such as issuing stock or repurchasing shares, generally fall under financing activities. It is a means of raising capital and involves changes to the company's ownership equity. When a company sells treasury stock for more than it originally paid to repurchase them, the transaction reflects a cash inflow in the financing section of the statement of cash flows.

If an established firm is looking to raise funds for a major expansion, choosing between borrowing and issuing stock can be challenging. Borrowing offers the advantage of keeping control of the company but incurs a commitment to make scheduled interest payments. In contrast, issuing stock dilutes ownership but does not commit the company to fixed repayment schedules. However, it does make the company accountable to the shareholders and a board of directors.

Answer 2

The sale of treasury stock at an amount greater than cost is classified as a financing activity in a statement of cash flows. The decision to raise funds through borrowing or issuing stock for a company expansion depends on factors like financial health, expected return on investment, and ownership control preferences.Therefore, the correct answer is C.

Step-by-step explanation:

In preparing a statement of cash flows, the sale of treasury stock at an amount greater than cost should be classified as a financing activity. A statement of cash flows is a financial document that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and it breaks down the analysis into operating, investing, and financing activities.

Selling treasury stock involves managing the equity capital structure of a company and it corresponds to transactions that affect the equity portion of the balance sheet, making it a financing activity.

As for the critical thinking question, if I owned a small firm that needed a surge of financial capital for major expansion, one has to weigh the pros and cons of different financing options. Borrowing means the company will keep control but commits to regular interest payments, which could be difficult if the income is insufficient.

Issuing stock dilutes ownership and entails becoming accountable to shareholders, but it does not require interest payments and could be more sustainable if the company's profits are uncertain. The decision would depend on current financial health, the expected return on investment for the expansion, and the company's tolerance for debt versus diluting ownership.