Statement of Cash Flows Noncash Investing & Financing Activities Not Reported on Statement or in Notes Operating Activities Investing Activities Financing Activities a. Declared and paid a cash dividend b. Recorded depreciation expense c. Paid cash to settle long-term note payable d. Prepaid expenses increased in the year e. Accounts receivable decreased in the year f. Purchased land by issuing common stock g. Inventory increased in the year h. Sold equipment for cash, yielding a loss i. Accounts payable decreased in the year j. Income taxes payable increased in the year

complete Question in order:

(check the first image attached below)

The following transactions (image above) and events occurred during the year. Assuming that this company uses the indirect method to report cash provided by operating activities, indicate where each item would appear on its statement of cash flows by placing an X in the appropriate column.

Answer and explanation:

Preambles:

Concepts and reason

Cash flow statement: Cash flow statement shows the changes in operating, investing, and financing activities of a company for the said stipulated period. This statement represents the sources and applications or uses of cash. The statement of cash flows provides the amount of cash available to meet the obligations of the corporation (liquidity position).  

Fundamentals

The following are the three different categories of cash flow activities:

Operating activities: Cash provided by or used in operations is a section of Statement of Cash Flows which includes the business operations transactions relating to manufacturing and delivering goods and providing services.

Investing activities: Cash provided by or used in investing activities is a section of Statement of Cash Flows which include the purchase or sale of equipment or land or marketable securities. Investment in land or equipment or furniture could be for running business and investment in marketable securities could be for generating cash in the form of dividends or interest.

Financing activities: Cash provided by or used in financing activities is a section of Statement of Cash Flows which includes raising cash from long-term debt or payment of long-term debt and dividends. The contributions received from public are a cash inflow and would be used for business operations like capital expenditures.The payment of dividends or interest is known as cash outflow.

Step 1

Determine the nature of activity and then, classify.  

Dividend declaration: Declaration of Dividend is classified under the Financing activity. The cash flow created by issuing and selling of shares and investments and distribution of dividend is treated as cash flow from Financing activity.  

Depreciation expense: Depreciation is non- cash expenditure and it is added back to the profit under operating activities while preparing cash flow statement.  

Paid cash to settle long- term note payable: This item is classified under financing activity. It is a cash outflow to settle a long-term debt.

Accounts receivable decreased in the year: Accounts receivable arises due to the operating activity of the enterprise. Therefore, these cash flows are classified under the operating activity.

Step 2

Determine the items provided in the question and classify according to the cash flow activity.  

Purchased land by issuing common stock is treated as non cash investing and financing activity.

Inventory increased in the year – the purchase of stock has increased, therefore, there is a cash outflow which is operating in nature.

Sold equipment for cash and yielded loss – any transaction dealing with the assets and cash flow is treated as cash flow from investing activity.

Though prepaid expenses pertain to the next accounting period, as the cash flow has happened for the due course of business, it is considered under the operating activity. See the second image

Here, land is purchased by issuing a share of common stock. Though purchase of land is an investing activity, it cannot be classified under the cash flows from investing activity.  

While preparing the cash flow statement, the loss/ profit on sale is not considered, but it is considered that whether the cash has flown in or out. Therefore, it is considered under the investing activity.

Any expenses payable paid or prepaid expenses incurred in the due course of business will be considered under the operating activities.See the second image

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