Question

Analysis of an income statement, balance sheet, and additional information from the accounting records of Gadgets, Inc., reveals the following items. Required:

1. Purchase of patent
2. Depreciation expanse
3. Decrease in account receivable
4. Increase in inventory
5. purchase of equipment

Indicate on which section of statement of the cash flow each of the item shoul be reported: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

Answer 1

Answer and Explanation:

There are three categories of cash flow statement activities which are described below:

1. Operating activities: This involves all transactions that after net income impact the working capital. It will subtract the rise in current assets and a reduction in current liabilities, while adding the decline in current assets and a rise in current liabilities.

This will change those changes in working capital. For addition, the depreciation expenses are applied to the net profit and the loss on the selling of assets is added, while the gain on the sale of assets is deducted

2. Investing activities: it tracks operations that involve purchasing and selling long-term properties. Purchase is cash outflow while selling is cash inflow

3. Financing operations: it tracks transactions that have an effect on long-term debt and equity balance of shareholders. Share issue is a cash inflow while redemption and dividend are cash outflows.

Based on this, the classification are as follows

1. Purchase of patent = Investing activities

2. Depreciation expanse = Operating activities

3. Decrease in account receivable = Operating activities

4. Increase in inventory = Operating activities

5. purchase of equipment = Investing activities

If these transactions are held in cash