Question

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:

1. Operating activity—add to net income.

2. Operating activity—deduct from net income.

3. Investing activity.

4. Financing activity.

5. Reported as significant noncash activity.

The transactions are as follows.

(a) Issuance of common stock.	(h) Payment of cash dividends.
(b) Purchase of land and building.	(i) Exchange of furniture for office equipment.
(c) Redemption of bonds	(j) Purchase of treasury stock.
(d) Sale of equipment.	(k) Loss on sale of equipment.
(e) Depreciation of machinery.	(l) Increase in accounts receivable during the year.
(f) Amortization of patent.	(m) Decrease in accounts payable during the year.
(g) Issuance of bonds for plant assets.

Short answer

1. Operating activity—add to net income:It includes the daily business activities that will generate cash for the business. It includes transactions such as decreases in thecurrent assets, increases in current liabilities, non-cash and non-operating activities reducing the net income are also recorded in this section only.

2. Operating activity—deduct from net income:It includes the daily business activities that generate cash. It includes transactions such as the increase in the current assets, decrease in thecurrent liabilities, non-cash, and non-operating activitiesincreasing the net income are also recorded in this section only.

3. Investing activity: under this section of the cash flow statement, the business entity records the purchase andsale of fixed assets, including cash payment and receipts.

4. Financing activity: All those activities that involve the issue and redemption of securities, either debt or equity, are reported under the financing section. It also includes repayment of the loan and withdrawal of the loan.

5. Reported as significant non-cash activity:It includes business activities that involve reduction or increase in the current assets, current liabilities, fixed assets, debt, and equitywithout any inflow and outflow of cash.

Step-by-step solution

Definition of Non-Cash Activity

Non-Cash activity can be defined as the transactions that do not involve any movement of cash, eitherinflow or outflow. Activities such as charging depreciation are non-cash activities.

Classification of activities

Activities	Classification in Statement of Cash Flow
(a) Issuance of common stock.	Financing Activity
(b) Purchase of land and building.	Investing Activity
(c) Redemption of bonds	Financing Activity
(d) Sale of equipment.	Investing Activity
(e) Depreciation of machinery.	Operating activity – Added to net income
(f) Amortization of patent.	Operating activity – Added to net income
(g) Issuance of bonds for plant assets.	Reported as significant non-cash activity
(h) Payment of cash dividends.	Financing Activity
(i) Exchange of furniture for office equipment.	Reported as significant non-cash activity
(j) Purchase of treasury stock.	Financing Activity
(k) Loss on sale of equipment.	Operating activity – Added to net income
(l) Increase in accounts receivable during the year.	Operating activity – Deducted from net income
(m) Decrease in accounts payable during the year.	Operating activity – Deducted from net income