Question

Crater HVAC Systems is preparing its statement of cash flows ​(indirect​ method) for the year ended March​ 31, 2018. To​ follow, in no particular​ order, is a list of items that will be used in preparing the​ company's statement of cash flows. Identify each item as an operating activity addition to net​ income; an operating activity subtraction from net​ income; an investing​ activity; a financing​ activity; or an activity that is not used to prepare the cash flows statement. a. Increase in inventory b. Issuance of common stock c. Decrease in accrued liabilities d. Net income e. Decrease in prepaid expense

Answer 1

a. Increase in inventory - an operating activity subtraction from net​ income

This is an operating activity as it has to do with the day to day business of the company and its operations. It is a subtraction from Net income because an increase in inventory means that more cash was spent to buy the inventory.

b. Issuance of common stock - a financing​ activity

Financing activities are those that have to do with raising capital for the business so when stock is issued and Equity is raised, it is a financing activity.

c. Decrease in accrued liabilities - an operating activity subtraction from net​ income

Liabilities are also in relation to the firm's operations so they are operating activities. This will be a subtraction from Net income because cash was used to pay off liabilities which is what reduced them.

d. Net income - operating activity addition to net​ income

Net income is derived from the operations of the business so is an Operating activity. It will increase net income evidently.

e. Decrease in prepaid expense - operating activity addition to net​ income

Prepaid expense is in relation to expenses which is an operating activity. It will be an addition to net income because as an asset, it reducing means that cash was not paid to acquire it.