Assume that a company purchases land for $100,000, paying $20,000 cash and borrowing the remainder with a long-term note payable. How should this transaction be reported on a statement of cash flows
Outflow investing activities (note), inflow investing activities (land), and outflow operating activities (cash).
To determine how this transaction should be reported on a statement of cash flows, we need to understand the components of a statement of cash flows and their classification.
A statement of cash flows categorizes all cash inflows and outflows into three main sections: operating activities, investing activities, and financing activities.
1. Operating Activities: This section includes cash flows directly related to the company's primary operations, such as revenue from sales and expenses. It does not include any financing or investing activities.
2. Investing Activities: This section includes cash flows related to the acquisition or sale of long-term assets, such as property, plant, and equipment. These activities are not part of the company's day-to-day operations.
3. Financing Activities: This section includes cash flows related to the company's financing and capital structure, such as borrowing or repaying loans, issuing or repurchasing equity, and paying dividends.
In the given transaction, the company purchases land for $100,000. It pays $20,000 cash, but the remaining $80,000 is borrowed through a long-term note payable.
Here's how this transaction should be reported on a statement of cash flows:
1. Cash Flow from Investing Activities:
- Outflow: $100,000 (the purchase price of the land)
2. Cash Flow from Financing Activities:
- Outflow: $80,000 (the borrowing of funds through the long-term note payable)
3. Cash Flow from Operating Activities:
- No impact: The transaction does not impact the operating activities section since it involves only investing and financing activities.
Therefore, the transaction would be reported as an outflow of $100,000 under the investing activities section and an outflow of $80,000 under the financing activities section on the statement of cash flows.