Question

Question: Classifying items on the indirect statement of cash flows

Destiny Corporation is preparing its statement of cash flows by the indirect method. Destiny has the following items for you to consider in preparing the statement:

a. Increase in accounts payable

b. Payment of dividends

c. Decrease in accrued liabilities

d. Issuance of common stock

e. Gain on sale of building

f. Loss on sale of land

g. Depreciation expense

h. Increase in merchandise inventory

i. Decrease in accounts receivable

j. Purchase of equipment

Identify each item as a(n): • Operating activity—addition to net income (O+) or subtraction from net income (O-) • Investing activity—cash inflow (I+) or cash outflow (I-) • Financing activity—cash inflow (F+) or cash outflow (F-) • Activity that is not used to prepare the indirect statement of cash flows (N)

Short answer

Answer

1. Operating (O+)
2. Financing (F-)
3. Operating (O-)
4. Financing (F-)
5. Operating (O-)
6. Operating (O+)
7. Operating (O+)
8. Operating (O-)
9. Operating (O+)
10. Investing (I-)

Step-by-step solution

Classification of activities

Transaction	Activity
a. Increase in accounts payable	Operating (O)
b. Payment of dividends	Financing (F)
c. Decrease in accrued liabilities	Operating (O)
d. Issuance of common stock	Financing (F)
e. Gain on sale of building	Operating (O)
f. Loss on sale of land	Operating (O)
g. Depreciation expense	Operating (O)
h. Increase in merchandise inventory	Operating (O)
i. Decrease in accounts receivable	Operating (O)
i. Decrease in accounts receivable	Investing (I)

Treatment of each transaction

Transaction	Activity	Treatment
a. Increase in accounts payable	Operating (O)	addition to net income (O+)
b. Payment of dividends	Financing (F)	cash outflow (F-)
c. Decrease in accrued liabilities	Operating (O)	subtraction from net income (O-)
d. Issuance of common stock	Financing (F)	cash outflow (F-)
e. Gain on sale of building	Operating (O)	subtraction from net income (O-)
f. Loss on sale of land	Operating (O)	addition to net income (O+)
g. Depreciation expense	Operating (O)	addition to net income (O+)
h. Increase in merchandise inventory	Operating (O)	subtraction from net income (O-)
i. Decrease in accounts receivable	Operating (O)	addition to net income (O+)
j. Purchase of equipment	Investing (I)	cash outflow (I-)