Question

Among the transactions of Salem, Inc., were the following. a. Made payments on accounts payable to merchandise suppliers. b. Paid the principal amount of a note payable to First State Bank c. Paid interest charges relating to a note payable to First State Bank d. Issued bonds payable for cash; management plans to use this cash in the near future to expand manufacturing and warehouse capabilities e. Paid salaries to employees in the finance department. f. Collected an account receivable from a customer 9. Transferred cash from the general bank account into a money market fund. h. Used the cash received in d, to purchase land and a building suitable for a manufacturing facility. 1. Made a year-end adjusting entry to recognize depreciation expense. j. At year-end, purchased for cash an insurance policy covering the next 12 months. k. Paid the quarterly dividend on preferred stock. 1. Paid the semiannual interest on bonds payable. n. Received a quarterly dividend from an investment in the preferred stock of another corporation n. Sold for cash an investment in the preferred stock of another corporation. o. Received cash upon the maturity of an investment in cash equivalents (Ignore interest) Required: Most of the preceding transactions should be included among the activities summarized in a statement of cash flows. For each transaction that should be included in this statement, indicate whether the transaction is classified as an operating activity, an investing activity, or a financing activity. If the transaction should not be included in the current year's statement of cash flows, (Assume that net cash flows from operating activities are determined by the direct method.) (Select "None" if none of the categories apply for a particular item.)

Answer 1

Transaction	Classification
a.	Operating activity
b.	Financing activity
c.	Operating activity
d.	Financing activity
e.	Operating activity
f.	Operating activity
g.	See Note 1
h.	Investing activity
i.	See Note 2
j.	Operating activity
k.	Financing activity
l.	Operating activity
m.	Operating activity
n.	Investing activity
o.	See Note 3

Transactions g., i., and o. should not be included in the current year's statement of cash flows.

Note 1: Cash invested in a money market fund being a cash equivalent, is not included in the cash flow statement since transfers between cash and cash equivalents are not treated as cash inflows or outflows in the cash flow statement.

Note 2: Depreciation being a non-cash expense, wherein there is no cash outflow in the current year, is not included in the statement of cash flows.

Note 3: Transfers between cash and cash equivalents are not treated as cash inflows or outflows in the cash flow statement.