Analysis of an income statement, balance sheet, and additional information from the accounting records of Gadgets, Inc., reveals the following items. Required: Select the section of the statement of cash flows in which each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.
1. Purchase of a patent. 2. Depreciation expense. 3. Decrease in accounts receivable. 4. Issuance of a note payable. 5. Increase in inventory. 6. Collection of notes receivable. 7. Purchase of equipment. 8. Exchange of long-term assets. 9. Decrease in accounts payable. 10. Payment of dividends.

Answer and Explanation:

The categorization is shown below:

1Purchase of a patent =Investing activities  as it represents in a negative sign because it is a cash outflow

2Depreciation expenseOperating activities  as it is added to the net income

3Decrease in accounts receivable =  Operating activities  as it is added to the change in adjustments column

4Issuance of a note payable = Financing activities  as it represents in a a positive sign because it is a cash inflow

5Increase in inventory =Operating activities  as it is deducted from the change in adjustments column

6Collection of note receivable = Investing activities  as it represents in a positive sign because it is a cash inflow

7Purchase of equipment  = Investing activities  as it represents in a negative sign because it is a cash outflow

8Exchange of long term assets =Separate non cash activities note  as it does not involved any cash transactions

9Decrease in accounts payable = Operating activities  as it is deducted from the change in adjustments column

10Payments of dividend =  Financing activities  as it represents in a negative sign because it is a cash outflow              

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