For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method.

a. Declaration and payment of a cash dividend.
b. Decrease in accounts receivable during a period.
c. Conversion of bonds payable into common stock.
d. Purchase of land for cash.
e. Decrease in merchandise inventory during a period.
f. Decrease in accounts payable during a period.
g. Issuance of preferred stock for cash.
h. Sale of equipment for cash at book value.

Answer and Explanation:

The cash flow statement includes three categories of operations which are listed below:

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

It will manage some adjustments in working capital. In addition, the depreciation costs are added to the net income and the loss on the sale of assets is added, while the gain on the sale of assets is deducted

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

3. Financing activities: it tracks transactions that have an impact 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

a. Declaration and payment of a cash dividend. = Cash outflow = finance activity

b. Decrease in accounts receivable during a period. = Added to the net income

c. Conversion of bonds payable into common stock = Significant non cash investing and financing activity as it does not involved any cash transactions

d. Purchase of land for cash = Cash outflow = Investing activity

e. Decrease in merchandise inventory during a period. = Added to the net income

f. Decrease in accounts payable during a period.  = Deduct from the net income

g. Issuance of preferred stock for cash.  = Cash inflow = Financing activity

h. Sale of equipment for cash at book value. = Cash inflow = financing activity

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