Question

Cash Flows From Operating Activities Add to Net Income Deduct from Net Income Cash Flows From Investing Activities Cash Flows From Financing Activities Category 1. Common stock is issued for cash at an amount above par value Select an option 2. Inventory increased during the period Select an option 3. Depreciation expense recorded for the period Select an option 4. Building was purchased for cash Select an option 5. Bonds payable were acquired and retired at their carrying value Select an option 6. Accounts payable decreased during the period Select an option 7. Prepaid expenses decreased during the period Select an option 8. Treasury stock was acquired for cash Select an option 9. Land is sold for cash at an amount equal to book value Select an option 10. Patent amortization expense recorded for a period

Answer 1

Answer:

1. Common stock is issued for cash at an amount above par value - From Financing Activities

2. Inventory increased during the period - From Operating Activities

3. Depreciation expense recorded for the period - Add to Net Income

4. Building was purchased for cash - From Investing Activities

5. Bonds payable were acquired and retired at their carrying value - From Financing Activities

6. Accounts payable decreased during the period - From Operating Activities

7. Prepaid expenses decreased during the period - From Operating Activities

8. Treasury stock was acquired for cash - From Financing Activities

9. Land is sold for cash at an amount equal to book value - From Investing Activities

10. Patent amortization expense recorded for a period - Add to Net Income

Explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation, changes in current assets (other than cash) and liabilities are considered as operating activities including income taxes.  

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

An increase in assets other than cash is an outflow while an increase in liabilities is an inflow. Depreciation and other non-cash expenses deducted in the income statements are added back while the non-cash income such gain on asset are deducted from net income.