 In this presentation, we will take a look at multiple choice questions related to the statement of cash flows. First question, activities that involve the sale of goods and services to customers are classified as support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like quickbooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it either a financing activities b investing activities c operating activities d direct activities e indirect activities. Let's go through this again using the process of elimination activities that involve the sale of goods and services to customers are classified as either a financing activities. Now when we have services we're talking about services to customers then you really I would go through this type of questions in terms of an ordering first thinking is something in the operating activities because that's where most things will be and then going through a process of elimination from there the operating activity deals with things that are going to be kind of related to the income statement it's kind of like the income statement on a cash basis. So in this case we're talking about activities that involve the sale of goods so you would think the normal journal entry there would be something to deal with revenue so I would think that the operating activities would be the place to go there so is it financing probably not because that would have to do with like bonds notes payable getting money for the company in some kind of fashion other than normal operations and then we have investing activities probably not there that's going to be something like if we have investments or purchasing equipment or something like that selling equipment or selling investments and then the operating I think it's going to be the one here it's pretty clear because it's it has the sale of costs of goods. Now we might have thought the D says the direct activities and indirect activities because we're talking about the sale of goods we might start to think well maybe it's the direct method we're using instead of the indirect method but they didn't really ask us about the method that we're using there they just asked us which classification it would go into so it would be classified under the operating activities no matter which method we were basically using here the activities related to the sale of services will be in the operating activities so we're going to say answer C activities that involve the sale of goods and services to customers are classified as C operating activities next question the purchase of equipment is classified as A financing activity B investing activities C operating activities D direct activities and E indirect activities so if we go through this again the purchase of equipment is classified as now again if we're thinking about the cash flow statement normally we're thinking about is it investing financing or operating these last two really the director indirect are don't look like they apply here they're kind of throwing us off there is a direct and indirect method but it doesn't look like this is asking a question about that they're asking where is it going to be classified is it financing investing or operating so if we for that purpose I think we can narrow down these questions between D and E and remove those and then think about financing investing and operating so the purchase of equipment I would think through a journal entry what does it have to do with first thinking is there something to do with the operating activities is there something involved with income and the journal entry to purchase equipment is typically going to be equipment equipment and that's going to be a debit let's say 100 and then we're going to credit something like let's say cash or notes payable and if that's going to be our journal tree nothing neither of those accounts are going to be income statement accounts and therefore it's probably not operating because operating typically deals with income type accounts we're going to try to get to net income on a cash flow basis and then I would typically think is it investing and that would be the question of did we get an asset are we investing in a long-term asset in this case of course we are we're buying equipment so I would think the answer then would be investing it's not financing because financing would be the company trying to get money basically capital through a loan through an investment from the owner or paying back a loan to pay back the financing or paying back the owner in the form of dividends or a draw in the case of a corporation or sole proprietorship partnership so the final answer the purchase of equipment is classified as b investing activities next question the issuance of common stock is classified as a financing activity b investing activity c operating activity d direct activities and e indirect activities so again this we're looking for the issuance of common stock now once again we're looking at the cash flow statement so we would think it would be either financing investing operating I'm going to say once again the d and e look to be things that aren't kind of throwing us off because they're not one of the major three categories they look to just be filling two extra spots in a multiple choice question so I'm going to cross those out and be left with a b and c and we have the issuance of common stock now if we think about the journal entry there we would say hmm what would the journal should be we would say we'd get cash if we issued common stock let's say it was 100 cash we're going to credit common stock but it's going to be credited for the par value let's say that was 75 that was a seven and then the difference is additional paid in capital of the 25 so typically it looks something like this now first I would ask is there anything that's going to be operating activity related meaning is there anything that's like an income statement account and none of these are income statement accounts so I would think it's not operating and then I would think well is there anything that we invested in did we invest in any are we purchasing like an asset here in this case no what we're getting is cash and we're not like getting it from selling an asset because we're selling an interest in the company we're selling something but we're selling our equity in the company not something that we own over the company owns so it's not investing then it's financing and so this is a way for them for the company to get money without selling something we're not selling an asset we're not you know doing some kind of normal operations we're just trying to get capital through an investment basically from the owners by selling capital stock so we have the issuance of common stock is classified as a financing activity next question interest paid on a loan is classified as a financing activity the investing activities c operating activities d direct activities and e indirect activities once again looking at the statement of cash flows I think we can eliminate and e and we're really looking for those three categories the cash flow statement financing investing or operating so interest paid on a loan now this can get a little bit tricky if we pay the interest on the loan typically we would say okay cash is going down and so that would be a credit and then we would debit interest expense now interest expense is an income statement item and therefore here we would think yeah that would be on operating activities so that would be the thought process the reason it's a little tricky is because it's the interest expense on a loan and that the taking of the loan itself would be financing activity but the interest is going to be reported on the income statement part of normal operations which we will have on the operating activities so final answer interest paid on loan is classified as c operating activities