Question

(Learning Objective 2: Distinguish among operating, financing, and investing activities indirect method) Crater HVAC Systems is preparing its statement of cash flows (indirect method) for the year ended March 31, 2018. To follow, in no particular order, is a list of items that will be used in preparing the company's statement of cash flows. Identify each item as an operating activity addition to net income; an operating activity subtraction from net income; an investing activity; a financing activity; or an activity that is not used to prepare the cash flows statement. a. Increase in inventory b. Issuance of common stock c. Decrease in accrued liabilities d. Net income h. Retained earnings i. Payment of dividends j. Increase in accounts payable k. Decrease in accounts receivable L Gain on sale of a building m. Loss on sale of land n. Depreciation expense Decrease in prepaid expense f. Collection of cash from customers g. Purchase of equipment with cash

Answer 1

Step-by-step explanation:

Basically there are three types of activities:

1. Operating activities: It includes those transactions which affect the working capital, and it records gain or loss on sale of fixed assets

2. Investing activities: It records those activities which include purchase and sale of the fixed assets

3. Financing activities: It records those activities which affect the long term liability and shareholder equity balance.

So, the classification is shown below:

a. Increase in inventory - deduct from operating activity

b. Issuance of common stock - financing activity

c. Decrease in accrued liabilities - deduct from operating activity

d. Net income - Add to operating activity

e. Decrease in prepaid expense - add to operating activity

f. Collection of cash from customers - an activity that is not used to prepare the cash flows statement through indirect method

g. Purchase of equipment with cash - investing activity

h. Retained earnings - an activity that is not used to prepare the cash flows statement

i. Payment of dividends - deduct from financing activity

j. Increase in accounts payable - add to operating activity

k. Decrease in accounts receivable - add to operating activity

L Gain on sale of a building - deduct from operating activity

m. Loss on sale of land - add to operating activity

n. Depreciation expense