Which part of a cash flow statement would be affected by the below items?
A Operating, investing, or financing part.
B Decrease in depreciation Increase in inventory
C Decrease in accounts payable Payment of dividend
D Proceeds from sale of long-term assets
The correct answer and explanation is:
The correct answer is A) Operating, investing, or financing part.
Here’s the breakdown of how each item affects different sections of a cash flow statement:
- Decrease in depreciation: Depreciation is a non-cash expense that reduces the book value of assets, primarily affecting the operating activities section of the cash flow statement. A decrease in depreciation means that there is a lower amount added back to the cash flows from operating activities, since depreciation is subtracted in the income statement but does not involve cash outflow.
- Increase in inventory: An increase in inventory represents a use of cash because the company has purchased more inventory that it hasn’t yet sold. This item impacts the operating activities section. Under the indirect method, an increase in inventory reduces cash flow from operations, as more cash is tied up in inventory.
- Decrease in accounts payable: Accounts payable represent amounts a company owes to suppliers. A decrease means the company has paid off some of its payables, reducing its cash flow. This affects the operating activities section, as it reflects a use of cash in day-to-day operations.
- Payment of dividend: Dividends are paid to shareholders and are not part of regular business operations. As a result, dividend payments fall under financing activities in the cash flow statement. This section tracks cash flows related to the company’s capital structure, including debt and equity financing.
- Proceeds from sale of long-term assets: The sale of long-term assets, such as property, equipment, or investments, generates cash inflows. These proceeds are reflected in the investing activities section, which records the cash flows associated with the purchase and sale of assets.
In summary, the cash flow statement consists of three sections: operating, investing, and financing activities. Each item mentioned corresponds to one of these sections, reflecting how cash is either used or generated in the company’s core operations, investment decisions, or financing activities.