Statement of Cash Flows....??

In a statement of cash flows, the cash flows from investing activities section should report
A. the issuance of common stock in exchange for a factory building
B. stock dividends received
C. a major repair to machinery charged to accumulated depreciation
D. the assignment of accounts receivable

When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because
A. cash was increased while cost of goods sold was decreased
B. cost of goods sold on an accrual basis is lower than on a cash basis
C. acquisition of inventory is an investment activity
D. inventory purchased during the period was less than inventory sold resulting in a net cash increase

In determining net cash flow from operating activities, a decrease in accounts payable during a period
A. means that income on an accrual basis is less than income on a cash basis
B. requires an addition adjustment to net income under the indirect method
C. requires an increase adjustment to cost of goods sold under the direct method
D. requires a decrease adjustment to cost of goods sold under the direct method

These are tough!

Q1 - choice C since its related to capital expenditure and capital expenditures are investing activities [this one was the easiest] -- {EDIT Note the answer SHOULD NOT be A since stock issuance is a non-cash event and is not picked up in the statement of cash flows}

Q2 - choice B since it makes some sense as higher inventory balances artifically depress COGS on an accrual basis; if you think about it, under the accrual basis, there is the matching principal so if you haven't sold the inventory, those cost don't appear on the income statement and explains why gross profit under the accrual basis is less than under
cash basis (in cash basis, the money was already spent which is why you have the inventory!).

Q3 - choice D if the accounts payable is related to inventory purchases. This one is tough and uses the same logic as Q2. {EDIT, I don't believe the answer is "C" because (i) the question stated doesn't state whether accounts payables are COGS related or SG&A related and (ii) it should be a decrease since changes in account payables are positively correlated to COGS adjustments on a cash basis assuming accounts payable is inventory related)}

#1. Answer is A. You would get a decrease in investing (for getting the factory building) and in increase in financing (for the common stock issuance).

Investing as defined for cash flow is not the same as people use when we talk of investment. For cash flow, investing means investing in the company. When you purchase fixed assets, you are investing in the company. Stocks and such are financing. That is why B is wrong. D is operating, so it is wrong. C is wrong in that changes in depreciation are also in operating.

#2 The answer is B as the previous answerer stated.

#3 The answer is C. I am looking at page 1232 of the 12th edition of Intermediate Accounting by Kieso, Weygandt and Warfield as I answer. It is right out of the cash flow chapter under a direct cash flow section.

So the previous answerer was wrong on 2 of these.

I am a CPA and part-time University instructor.