Chapter 16, Problem 1QS

Transaction classification by activity
C1

Classify the following cash flows as either operating (O), investing (I), or financing (F) activities.

1. Sold long-term investments for cash.
2. Received cash payments from customers.
3. Paid cash for wages and salaries.
4. Purchased inventories for cash.
5. Paid cash dividends.
6. Issued common stock for cash.
7. Received cash interest on a note.
8. Paid cash interest on outstanding notes.
9. Received cash from sale of land at a loss.
10. Paid cash for property taxes on building.

To determine

Introduction:

Cash flow statement is one of the most important parts of any organisation's Financial Statements. This cash flow statement shows the flow of cash in (sources) and cash out (uses) of the organisation. This statement is prepared for a given period and each transaction is classified into three activities namely, Operating, Investing or Financing.

Her, in the problem provided to us, we are required to ascertain the classification of each transaction given to us into three activities namely, Operating, Investing or Financing.

Answer to Problem 1QS

Solution:

Sr. No.	TRANSACTIONS	ACTIVITIES
1.	Sold long term investments for cash	Investing activity
2.	Received cash payments from customers	Operating activity
3.	Paid cash for wages and salaries	Operating activity
4.	Purchased inventories for cash	Operating activity
5.	Paid cash dividends	Financing activity
6.	Issued common stock for cash	Financing activity
7.	Received cash interest on a note	Operating activity
8.	Paid cash interest on outstanding notes	Operating activity
9.	Received cash from sale of land at a loss	Investing activity and Operating activity
10.	Paid cash for property taxes on building	Operating activity

Explanation of Solution

Every cash flow statement has three parts namely,

A) Cash flows from operating activities:-

These activities result from the operations of an organisation. The starting point of these activities is the net income earned by the organisation and adding into them the non cash expenses like depreciation, amortisation etc. and also adding the changes in working capital. There are two methods of reporting operating activities which are direct method and indirect method.

B) Cash flows from Investing Activities:-

These activities primarily show an organisation's purchase and sale of capital assets i.e. noncurrent assets like property, plant and equipment etc.

C) Cash flows from Financing Activities:-

These activities include transactions which allows an organisation to raise capital i.e. transactions which allow it to finance its operations and how the payment is made to its stakeholders like common stock holders, lenders of long term capital.Now, we will classify each of the ten transactions given to us into these three activities in the below drawn table.

Following table will classify each transaction into three categories:-

Sr. No.	TRANSACTIONS	ACTIVITIES	COMMENT
1.	Sold long term investments for cash	Investing activity	Sale will be shown as positive amount as it will result in cash inflows.
2.	Received cash payments from customers	Operating activity	Shown in direct method while showing operating activities as a positive amount.
3.	Paid cash for wages and salaries	Operating activity	Shown in direct method while showing operating activities as a negative amount.
4.	Purchased inventories for cash	Operating activity	Shown in direct method while showing operating activities as a negative amount.
5.	Paid cash dividends	Financing activity	Shown as a negative amount as it results into cash outflow.
6.	Issued common stock for cash	Financing activity	Shown as a positive amount as it results into cash inflows.
7.	Received cash interest on a note	Operating activity	Shown as a positive amount as it results into cash inflows.
8.	Paid cash interest on outstanding notes	Operating activity	Shown as a negative amount as it results into cash inflows.
9.	Received cash from sale of land at a loss	Investing activity and Operating activity	Sale proceeds shown under investing activity and loss shown as addition to net income under operating activity.
10.	Paid cash for property taxes on building	Operating activity	Generally, shown as operating item, but can also be shown under investing activity as negative amount.

Conclusion

Hence, cash flow statement is an integral part of an organisation's annual report because even if the statement of income shows net loss, then the cash flow statement can give a thorough check to the stakeholders as if the organisation has positive cash balance or negative cash balance even after suffering a loss because, if it has a positive cash balance with net loss, then it can be said that organisation is capable of turning this net loss figure to net profit in the future periods.