Question

Question: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

Short answer

Answer

Transaction	Classification
(a) Cash payments to employees	(1) Operating
(b) Redemption of bonds payable	(3) Financing
(c) Sale of building at book value	(2) Investing
(d) Cash payments to suppliers	(1) Operating
(e) Exchange of equipment for furniture	(4) significant noncash investing and financing activities
(f) Issuance of preferred stock	(3) Financing
(g) Cash received from customers	(1) Operating
(h) Purchase of treasury stock	(3) Financing
(i) Issuance of bonds for land	(4) significant noncash investing and financing activities
(j) Payment of dividends	(3) Financing
(k) Purchase of equipment	(2) Investing
(l) Cash payments for operating expenses	(1) Operating

Step-by-step solution

Definition of Cash Flow Statement

The statement prepared by the business entity providing the information regarding all the transactions that increase or decrease the cash balance is known as the cash flow statement. Such a statement is prepared in three sections.

Classification of items

1. Operating activity includes all the transactions that are related to daily business activities. For example, payments made to suppliers, receipt of cash from customers, and payment of any operating expense.
2. Financing activities: All those activities that include the issue of securities either equity or debt are included in the financing activities.
3. Investing activities: All those activities that involve the purchase and sale of the asset against cash are reported in the investing activities section.
4. Significant non-cash investing and financing activities: Such activities do not involve cash but involve the issue of securities against the acquisition of asset.