Question

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. 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-)

• Non-cash investing and financing activity (NIF)

• Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

1. Loss on sale of land.
2. Acquisition of equipment by issuance of note payable.
3. Payment of long-term debt.
4. Acquisition of building by issuance of common stock.
5. Increase in Salaries Payable.
6. Decrease in Merchandise Inventory.
7. Increase in Prepaid Expenses.
8. Decrease in Accrued Liabilities.
9. Cash sale of land (no gain or loss).
10. Issuance of long-term note payable to borrow cash.
11. Depreciation Expense.
12. Purchase of treasury stock.
13. Issuance of common stock.
14. Increase in Accounts Payable.
15. Net income.
16. Payment of cash dividend

Short answer

Answer

1. Operating (O)
2. Non-cash (NIF)
3. Financing (F)
4. Non-cash (NIF)
5. Operating (O)
6. Operating (O)
7. Operating (O)
8. Operating (O)
9. Investing (I)
10. Financing (F)
11. Operating (O)
12. Financing (F)
13. Financing (F)
14. Operating (O)
15. Operating (O)
16. Financing (F)

Step-by-step solution

Meaning of Cash Flow Statement 

A cash flow statement is a statement prepared by the business entities that shows the sources from where the cash comes inand the usage due to which cash goes out.

Classification of activities

Transaction	Activity
a. Loss on sale of land.	Operating (O)
b. Acquisition of equipment by issuance of note payable.	Non-cash (NIF)
c. Payment of long-term debt.	Financing (F)
d. Acquisition of building by issuance of common stock.	Non-cash (NIF)
e. Increase in Salaries Payable.	Operating (O)
f. Decrease in Merchandise Inventory.	Operating (O)
g. Increase in Prepaid Expenses.	Operating (O)
h. Decrease in Accrued Liabilities.	Operating (O)
i. Cash sale of land (no gain or loss).	Investing (I)
j. Issuance of long-term note payable to borrow cash.	Financing (F)
k. Depreciation Expense.	Operating (O)
l. Purchase of treasury stock.	Financing (F)
m. Issuance of common stock.	Financing (F)
n. Increase in Accounts Payable.	Operating (O)
o. Net income.	Operating (O)
p. Payment of cash dividend	Financing (F)

Treatment of each transaction

Transaction	Activity	Treatment
a. Loss on sale of land.	Operating (O)	cash outflow (O-)
b. Acquisition of equipment by issuance of note payable.	Non-cash (NIF)	Non-cash investing and financing activity (NIF)
c. Payment of long-term debt.	Financing (F)	cash outflow (F-)
d. Acquisition of building by issuance of common stock.	Non-cash (NIF)	Non-cash investing and financing activity (NIF)
e. Increase in Salaries Payable.	Operating (O)	addition to net income (O+)
f. Decrease in Merchandise Inventory.	Operating (O)	subtraction from net income (O-)
g. Increase in Prepaid Expenses.	Operating (O)	addition to net income (O+)
h. Decrease in Accrued Liabilities.	Operating (O)	subtraction from net income (O-)
i. Cash sale of land (no gain or loss).	Investing (I)	cash inflow (I+)
j. Issuance of long-term note payable to borrow cash.	Financing (F)	cash inflow (F+)
k. Depreciation Expense.	Operating (O)	addition to net income (O+)
l. Purchase of treasury stock.	Financing (I)	cash outflow (F-)
m. Issuance of common stock.	Financing (F)	cash inflow (F+)
n. Increase in Accounts Payable.	Operating (O)	addition to net income (O+)
o. Net income.	Operating (O)	-
p. Payment of cash dividend	Financing (F)	cash outflow (F-)