Question

The issuance of common stock and declaration and payment of cash dividends will result in the following:

a. Increase in financing activities for the issuance and a decrease in financing activities for the dividends.

b. Increase in investing activities for the issuance and a decrease in financing activities for the dividends.

c. Increase in financing activities for the issuance and a decrease in investing activities for the dividends.

d. Decrease in financing activities for the issuance and a decrease in financing activities for the dividends.

Answer 1

Answer: a. Increase in financing activities for the issuance and a decrease in financing activities for the dividends.

Step-by-step explanation:

When using the Indirect method of the Cash Flow Statement, you will find 3 sections namely, the Operating Activities, Investing Activities and Financing Activities.

The Operating Activities deal with the normal business Transactions and related entries that keep the business running.

Investing Activities have to do with entries related to Non Current Assets as well as stocks and bonds in other companies.

The above relates to the Financing Section that handles the raising of Capital needed to run the business. They include long term debt and Equity.

When new Equity is announced it is a Cash inflow for the business meaning that there will be an INCREASE in Financing Activities.

Dividends have the effect of reducing Equity so it is a Cash Outflow. This means that there will be a DECREASE in Financing Activities as a result of the declared Dividends.