Transactions that affect long term liabilities and stockholders’ equity are classified as which of the following?
Select one:
a. Investing activities
b. Administrative Activities
c. Operating Activities
d. Financing Activities
The correct answer and explanation is:
The correct answer is d. Financing Activities.
Explanation:
In accounting and financial reporting, the cash flow statement is divided into three main categories: operating activities, investing activities, and financing activities. Each of these categories captures different aspects of a company’s financial transactions.
Financing activities include transactions related to the borrowing and repayment of funds, as well as transactions involving the issuance and repurchase of equity. These activities have a direct impact on the long-term liabilities and stockholders’ equity of a company.
For example, when a company issues bonds or takes out a loan, it is engaging in a financing activity. The funds raised from these activities increase the company’s long-term liabilities. Similarly, when a company issues stock, it is increasing its equity capital, which is reflected in stockholders’ equity.
On the other hand, investing activities involve transactions related to the acquisition or sale of long-term assets such as property, equipment, and investments in securities. These do not directly impact the company’s long-term liabilities or stockholders’ equity.
Operating activities refer to the core business activities that generate revenue and incur expenses, such as the sale of goods and services. These activities mainly affect the company’s income statement and working capital, not long-term liabilities or stockholders’ equity.
Administrative activities are not a separate category in the cash flow statement. They generally refer to tasks related to the management and oversight of the business, but they don’t directly influence the financial categories like long-term liabilities or equity.
In summary, transactions that affect long-term liabilities and stockholders’ equity are classified as financing activities because they relate to how the company raises and manages capital over the long term.