Question

Classification of Cash Flows The following are several transactions and events that might be disclosed on a company's statement of cash flows: Required: 1. Identify in which section (if any) of the statement of cash flows each of the preceding items would appear and indicate whether it would be an inflow (addition) or outflow (subtraction). a. issuance of common stock Financing activities; inflow (addition) b. purchase of building Investing activities; outflow (subtraction) c. net income Operating activities; inflow (addition) d. increase in accounts receivable Operating activities; inflow (addition) e. depreciation expense Operating activities; outflow (subtraction) f. sale of land at cost Operating activities; inflow (addition) g. conversion of bonds to common stock Financing activities; inflow (addition) h. increase in accounts payable Investing activities; outflow (subtraction) i. payment of cash dividends Financing activities; outflow (subtraction) j. issuance of a stock dividend Operating activities; outflow (subtraction)

Answer 1

The transactions are classified under operating, investing, or financing activities in the statement of cash flows, with issuance of common stock and payment of cash dividends being financing activities, purchase of a building being an investing activity, and net income and changes in working capital components like accounts receivable and accounts payable being part of operating activities.

Step-by-step explanation:

In the context of the statement of cash flows, transactions and events are classified into three main sections: operating activities, investing activities, and financing activities. Each transaction is identified as either an inflow (addition) of cash or an outflow (subtraction) of cash. Below is the classification of each given item:

• Issuance of common stock - Financing activities; inflow (addition).
• Purchase of building - Investing activities; outflow (subtraction).
• Net income - Operating activities; inflow (addition).
• Increase in accounts receivable - Operating activities; outflow (subtraction), because this represents revenue earned but not yet received in cash.

• Depreciation expense - Operating activities; non-cash item, typically adjusted for in the calculation of cash flow from operations.

• Sale of land at cost - Investing activities; inflow (addition), since no gain or loss is recognized.
• Conversion of bonds to common stock - No effect on cash flow since this is a non-cash financing activity.
• Increase in accounts payable - Operating activities; inflow (addition), because this reflects expenses incurred but not yet paid in cash.

• Payment of cash dividends - Financing activities; outflow (subtraction).
• Issuance of a stock dividend - No effect on cash flow since this is a non-cash financing activity.

It is important to note that the conversion of bonds to common stock and the issuance of a stock dividend do not affect the cash flow directly, hence they are non-cash transactions. Additionally, depreciation expense is a non-cash charge and therefore does not result in a cash outflow.

Answer 2

Classification of Cash Flows

Transaction Statement of Cash Flows Section

a. issuance of common stock Financing activities; inflow (addition)

b. purchase of building Investing activities; outflow (subtraction)

c. net income Operating activities; inflow (addition)

d. increase in accounts receivable Operating activities; outflow (subtraction)

e. depreciation expense Non-cash flow activities; No flow (but addition to net income)

f. sale of land at cost Investing activities; inflow (addition)

g. conversion of bonds to common stock Non-cash Financing activities; No flow (No addition or subtraction)

h. increase in accounts payable Operating activities; inflow (addition)

i. payment of cash dividends Financing activities; outflow (subtraction)

j. issuance of a stock dividend Non-cash financing activity; No flow (No addition or subtraction)

Step-by-step explanation:

Sections of the Statement of Cash Flows:

Operating Activities section records the inflow and outflow of cash generated from normal business activities.

Investing Activities section records the inflow and outflow of cash resulting from the procurement and sale of non-current assets and other investments in securities, including stocks and bonds.

Financing Activities section records the inflow and outflow of cash from short-term and long-term liabilities and owner's equity. The inflows are used for financing the business activities while the outflows are for repayments.