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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Classification of Cash Flows

Stanfield Inc. reported the following items in its statement of cash flows presented using the indirect method.

a. Decrease in inventory

b. Paid a cash dividend to stockholders

c. Purchased equipment for cash

d. Issued long-term debt

e. Depreciation expense

f. Sold a building for cash

Required:

Indicate whether each item should be classified as a cash flow from operating activities, a cash flow from investing activities, or a cash flow from financing activities.

To determine

Introduction:

A cash flow statement normally breaks out an organization’s cash sources and uses for the period into three classifications: cash flow from operating activities, cash flow from investing activities, and cash flow from financing exercises.

To choose:

Indicate whether each item should be classified as a cash flow from operating activity, a cash flow from investing activities, or a cash flow from financing activity.

Explanation

Following item should mention under the head in the indirect method of cash flow

Particular Head in the cash flow Reasons
Decrease in inventory Add: Operating head (Working capital changes) Inventory is related to normal part of the daily business activity so, this is considered as operating activity.
Paid a cash dividend to stockholders Add: Operating head (net profit before tax and extraordinary item

Less: under the financial activity head

Dividend paid in cash to shareholder, this activity related to financing activity
Purchase equipment for cash Less: investing activity Purchase of equipment means increase the asset and cash has to be outflow...

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