1.Treasury stock purchases made with cash are classified as cash outflows from f

Question

1.Treasury stock purchases made with cash are classified as cash outflows from financing activities on the statement of cash flows.

True

False

2. When preparing the operating activities section of the statement of cash flows using the indirect method, accumulated depreciation is added to net income in the operating section.

True

False

3. The payment of salaries and wages would be reported as an operating activity on the statement of cash flows.

True

False

4. The reporting of financing activities is identical under the indirect and direct methods for the statement of cash flows on the statement of cash flows.

True False

Explanation / Answer

Answer 1 : True

Treasury Stock are shares which the company has purchased under buy-back scheme. Cash paid to purchase Treasury Stock is a part of Financing Activity since activities related to Owner's Equity are a part of financing activity.

Answer 2 : False

Depreciation for the current year (which has actually been charged off against current year's profit) is added back.

While computing cash flow from operating activities (indirect method), Net profit for the year is taken as base and all the non-cash operating expenses are added back which have been reduced from this net profit. Since, depreciation expense reduced from net profit is the depreciation of a particular year (and not accumulated depreciation), this current year's depreciation only will be reduced from Net Profit.

Answer 3 : True

Under Direct Method, payment of salaries and wages is reported under operating activities since they assist in operating the business.

Under Investing activities, those activities are recorded which relate to investment made by the company like land purchased, shares purchased etc

Under Finacing activities, those activities are recorded which relate to owner's equity and non-current liability.

Answer 4: True

The only difference in Direct and Indirect Method arises in reporting of operating activities.

Reporting of financing as well as investing activities is same under both the methods.

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