Question

The CEO of Home Store was concerned about the company’s drop in cash from $130,000 at the beginning of the year to $32,000 at the end of the year. The $98,000 decrease in cash came primarily from the purchase of a forklift, which was paid in cash rather than being financed.

REQUIRED:

1) Identify whether the cash payment for the purchase of equipment would appear in the operating, investing, or financing activities section of the statement of cash flows.

2) Explain why a small increase in cash from operating activities might be more concerning to investors than a large decrease in cash from investing or financing activities.

Answer 1

Requirement 1

Purchase of Equipment will be shown in Investing Activities as a cash outflow.

Requirement 2

This is a fact that a small increase in cash from operating activities might be more concerning to investors than a large decrease in cash from investing or financing activities because cash used in investing activities are due to expansion of the business. Every time a company spends money on new equipment, it has planned something to expand and increase in returns. On the other hand Operating cash is the main source of cash for any business. Decrease in operating cash can lead to high amount of short term or long term loans to fulfill financial needs. This is the reason that decrease in operating cash makes investors more worried than decrease inj cash due to investing activities.