Exercise-1: Operating, investing and financing activities and their effect

Learning objectives:
This exercise focuses on categorizing business activities as operating, investing, and financing activities and how they impact the statement of cash flows.

Delta Company uses an indirect method to prepare its statement of cash flows. The list of various activities performed by the company during the year 2024 is given below.

1. Purchase of treasury stock
2. Purchase of available for sale investment
3. Sale of equipment at a loss
4. Increase in accounts payable
5. Retirement of bonds
6. Issuance of bonds
7. Decrease in accounts payable
8. Increase in inventory
9. Loan from bank by signing a note
10. Increase in accounts receivable
11. Purchase of equipment by issuing a note
12. Purchase of land and building.
13. Decrease in accounts receivable.
14. Payment of dividends.
15. Issuance of stock for cash.
16. Sale of land at a gain.
17. Depreciation expense.
18. Sale of land at book value.

Required: Explain how each of the above activities would affect the statement of cash flows of Delta Company.

Solution:

1. Purchase of treasury stock is reported as cash outflow in financing activities section.
2. Purchase of available for sale investment is reported as cash outflow in investing activities section.
3. Sale of equipment at a loss will affect two sections – operating activities section and investing activities section. As the company uses indirect method, the loss on sale of equipment will be added back to the net operating income in the operating activities section and the total proceeds realized from the sale of equipment will be reported as cash inflow in investing activities section.
4. Increase in accounts payable is added to net income in the operating activities section to convert accrual based net income to net cash provided by operating activities.
5. The retirement of bonds is a financing activity and reported as cash outflow in financing activities section.
6. The issuance of bonds brings cash in the company. It is also a financing activity and reported as cash inflow in financing activities section.
7. Decrease in accounts payable is deducted from net income in the operating activities section to convert accrual based net income to net cash provided by operating activities.
8. Increase in inventory is deducted from net income in operating activities section.
9. Loan from bank by signing a note is a financing activity. It is reported as inflow of cash in financing activities section of statement of cash flows.
10. Increase in accounts receivable is deducted from net income in operating activities section.
11. Purchase of equipment by issuing a note is a non-cash investing activity. See non-cash investing and financing activities and their disclosure.
12. Purchase of land and building are investing activities and are disclosed as cash outflows in investing activities section.
13. Decrease in accounts receivable is added to net income in the operating activities section.
14. Payment of dividend is a financing activity and the outflow of cash resulting from such activity is reported in financing activities section of the statement of cash flows.
15. Issuance of stock is a financing activity, the resulting cash inflow is reported in financing activities section.
16. Sale of land at a gain is an investing activity. The total sale proceeds are reported under investing activities section. The amount of gain is deducted from net income in the operating activities section.
17. Depreciation expenses are  non-cash expenses and are added back to net operating income in operating activities section to convert accrual based net income to net cash provided by operating activities.
18. Sale of land at book value is an investing activity, the inflow of cash resulting from the sale of land is reported in investing activities section.