Question

Which section(s) (from the options below) will be affected on the statement of cash flows following a...

-Acquisition of equipment using a note payable for 100% of the purchase price

-Acquisition of treasury stock at a price greater than par value.

-Acquisition of a new car by exchange for a used car of equal value.

SECTION OPTIONS:

A. Added to net income in the operating section

B. Deduction from net income in the operating section

C. Cash receipt in investing section

D. Cash paid in investing section

E. Cash receipt in financing section

F. Cash paid in financing section

G. Noncash investing and/or financing activity

Answer 1

Statements: Answers: 1) Acquisition of equipment using a note payable for 100% of the purchase price G. Noncash investing and/or financing activity 2) Acquisition of treasury stock at a price greater than par value. F. Cash paid in financing section 3) Acquisition of a new car by exchange for a used car of equal value. G. Noncash investing and/or financing activity Explanation: Statement of cash flows for a reporting period explains the reason for change in cash balance between two reporting periods concerned. Reasons are broadly classified into three categories such as operating activities, investing activities and financing activities. When a transaction involves cash inflows, it is considered as CASH RECEIPTS; When a transacton involves cash outflows, it is considered as CASH PAID. Based on the nature of transactions involved, it must be reported under any one of the three categories mentioned above. For Statement-1, acquisition of equipment is an investing activity and issue of note payable is a financing activity. However, as the equipment is acquired by issuing note payable, no cash movement takes place here. Therefore, it is considered as "Noncash investing and/or financing activity". For Statement-2, acquisition of treasury stock is a financing activity that involves cash outflow. Whether it is acquired at its par value or greater than par value doesn't change its classification. Therefore, it is considered as "Cash paid in financing section". For Statement-3, acquisition of new car is an investing activity and disposal of old car is also an investing activity. However, as new car is acquired by exchanging it for used car, no cash movement takes place here. Therefore, it is considered as "Noncash investing and/or financing activity".