Multiple Choice
Which of the following statements regarding operating cycles is true when preparing the statement of cash flows using the indirect method?
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13. Statement of Cash Flows
Operating Activities: Indirect Method
Multiple Choice
Which of the following cash flows is classified as an operating activity under the indirect method?
A
Cash received from issuing common stock
B
Cash paid to acquire equipment
C
Cash received from customers
D
Cash dividends paid to shareholders
Verified step by step guidance1
Understand the classification of cash flows: Cash flows are categorized into operating, investing, and financing activities. Operating activities involve the primary revenue-generating activities of the business, such as cash received from customers or cash paid to suppliers.
Review the indirect method: Under the indirect method, operating activities start with net income and adjust for non-cash transactions, changes in working capital, and other items related to the core operations of the business.
Analyze each option: Cash received from issuing common stock is a financing activity, as it relates to raising capital. Cash paid to acquire equipment is an investing activity, as it involves purchasing long-term assets. Cash dividends paid to shareholders are financing activities, as they represent a return to investors.
Identify the correct classification: Cash received from customers is classified as an operating activity because it directly relates to the core operations of the business and represents revenue generation.
Conclude the reasoning: Under the indirect method, cash received from customers is included in the adjustments to net income to calculate cash flows from operating activities, as it reflects the inflow of cash from the company's primary business operations.
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