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Classification of Cash Flows The following are several transactions and events that might be disclosed on a company's statement of cash flows: Required: 1. Identify in which section (if any) of the statement of cash flows each of the preceding items would appear and indicate whether it would be an inflow (addition) or outflow (subtraction). a. issuance of common stock Financing activities; inflow (addition) b. purchase of building Investing activities; outflow (subtraction) c. net income Operating activities; inflow (addition) d. increase in accounts receivable Operating activities; inflow (addition) e. depreciation expense Operating activities; outflow (subtraction) f. sale of land at cost Operating activities; inflow (addition) g. conversion of bonds to common stock Financing activities; inflow (addition) h. increase in accounts payable Investing activities; outflow (subtraction) i. payment of cash dividends Financing activities; outflow (subtraction) j. issuance of a stock dividend Operating activities; outflow (subtraction)

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Answer:

Classification of Cash Flows

Transaction                                       Statement of Cash Flows Section

a. issuance of common stock            Financing activities; inflow (addition)

b. purchase of building                  Investing activities; outflow (subtraction)

c. net income                                     Operating activities; inflow (addition)

d. increase in accounts receivable   Operating activities; outflow (subtraction)

e. depreciation expense                   Non-cash flow activities; No flow (but addition to net income)

f. sale of land at cost                         Investing activities; inflow (addition)

g. conversion of bonds to common stock Non-cash Financing activities;  No flow (No addition or subtraction)

h. increase in accounts payable      Operating activities; inflow (addition)

i. payment of cash dividends           Financing activities; outflow (subtraction)

j. issuance of a stock dividend        Non-cash financing activity; No flow (No addition or subtraction)

Explanation:

Sections of the Statement of Cash Flows:

Operating Activities section records the inflow and outflow of cash generated from normal business activities.

Investing Activities section records the inflow and outflow of cash resulting from the procurement and sale of non-current assets and other investments in securities, including stocks and bonds.

Financing Activities section records the inflow and outflow of cash from short-term and long-term liabilities and owner's equity.  The inflows are used for financing the business activities while the outflows are for repayments.

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