Question

4. 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.

a) 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.

b) 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

a) Cash payment for the purchase of forklift would appear in the investing activities section of the statement of cash flows because forklift is an asset. And in investing activities we records the purchase and sale of the assets.

b) Small increase in cash from operating activities might be more concerning to investors than a large decrease in cash from investing or financing activitie because if there will be no cash from operating activities then it would be difficult for the company to pay the dividend income to the investor.