Question

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A) Operating, $2,000; financing $16,000.
B) Operating, $0; financing $18,000.
C) Operating, $12,000; financing $6,000.
D) Operating, $18,000; financing $0.

Answer 1

Answer:

C) Operating, $12,000; financing $6,000.

Explanation:

Interests expenses do no change the notes payable or bond, but results in the reduction of the cash flow of a company. Therefore, the interests paid on both short terms notes payable and interest on long-term bonds will appear under the operating activities section of the cash flow statement.

Dividend appears under the financing activities section of the cash flow statement.

For this question, we therefore have:

Cash outflows from operating activities = Interest on short-term notes payable + Interest on long-term bonds = $2,000 + $10,000 = $12,000

Cash outflows from financing activities = Dividends on common stock = $6,000

Therefore, the correct option is C) Operating, $12,000; financing $6,000.