How would Long-term Debt be classified on the statement of cash flows?
Group of answer choices
Operating accounts.
Financing accounts.
Cash accounts.
Investing accounts.
The correct answer and explanation is:
The correct classification for long-term debt on the statement of cash flows is Financing accounts.
Long-term debt represents funds that a company borrows for a period longer than one year, such as bonds, bank loans, or other types of debt obligations. The cash flow related to long-term debt is classified under financing activities because it involves the company’s capital structure and how it raises funds to finance operations and growth.
On the statement of cash flows, financing activities include transactions related to the issuance or repurchase of the company’s own equity and debt. When a company borrows money by issuing long-term debt, it receives cash, which is a cash inflow. Conversely, when the company repays long-term debt, it results in a cash outflow.
The financing section is crucial because it reflects how the company manages its debt and equity to fund its activities, and it provides insights into the company’s capital structure, liquidity, and ability to meet future obligations. Changes in long-term debt, such as new borrowings or repayments, are directly reflected in this section.
On the other hand, operating activities involve day-to-day business operations, like revenue and expenses from selling goods or services. Investing activities relate to the purchase and sale of long-term assets, such as property, plant, equipment, and securities. Cash accounts would only include actual cash transactions, and long-term debt does not fall under this category.
In summary, long-term debt is classified under financing activities because it involves raising capital for the business, either through borrowing or repaying debt, which directly impacts the company’s capital structure and liquidity.