Question

In January of last year, Newton Inc. sold 15,000 shares of its own common stock for $180,000. Ten months later, Newton repurchased 5,000 of those shares at a price of $11 per share. When compiling its statement of cash flows for the year, Newton should record which of the following entries in relation to these stock transactions, and why?(A) Both a $180,000 cash inflow and a $55,000 cash outflow should be recorded in the financing section because both transactions involve stockholders' equity items, and all cash flows must be reported gross. (B) A net cash inflow of $125,000 should be recorded in the financing section because both transactions involve stockholders' equity items, and all cash flows related to a particular activity must be netted against one another. (C) A net cash inflow of $125,000 should be recorded in the investing section because both transactions involve changes in the company's investments, and all cash flows related to a particular activity must be netted against one another. (D) A $180,000 cash inflow should be recorded in the financing section because the stock sale affects stockholders' equity, and a $55,000 cash outflow should be recorded in the investing section because the stock repurchase represents an investment.

Answer 1

Answer: the correct answer is (A) Both a $180,000 cash inflow and a $55,000 cash outflow should be recorded in the financing section because both transactions involve stockholders' equity items, and all cash flows must be reported gross.

Explanation:

The important thing here is that all cash flows must be reported gross.