Question

Evaluating Cash Flows at Home Store, Inc. Refer to the dialogue at Home

Store, Inc., presented at the beginning of the chapter and the follow-up dialogue after.

Required:

a. Why was the CEO concerned about the company’s cash flow?

b. Why did the CEO state, “We probably should have financed the equipment rather than having paid for it all at once”?

Classifying Cash Flows. Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows.

Briefly explain your answer for each item.

1. Cash receipts from the sale of common stock

2. Cash receipts from the sale of a building

3. Cash payments for income taxes

4. Cash receipts from issuance of bonds

5. Cash payments for the purchase of equipment

Answer 1

1. Cash receipts from the sale of common stock-Financing Activity

Reason: it is done with the objective of raising funds and it is not a day to day activity of the organisation.

2. Cash receipts from the sale of a building-Investing Activity

Reason: Assumed it is not done in normal course of business, so it will be a investing acticity

3. Cash payments for income taxes-Operating Activity

Reason: As the payment of income tax arises in normal course of business.

4. Cash receipts from issuance of bonds-Financing Activity

Reason: it is done with the objective of raising funds and it is not a day to day activity of the organisation.

5.Cash payments for the purchase of equipment-Investing Activity

Reason: Assumed it is not done in normal course of business, so it will be a investing acticity