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:

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

2 Depreciation expense Operating activities as it is added to the net income

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

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

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

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

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

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

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

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