Business Degree Certification Practice Test

What does the section for cash flows from operating activities include in the statement of cash flows?

1. Dividends paid

2. Issuance of common stock

3. A decrease in accounts payable

4. Purchase of a building financed by mortgage

The correct answer is: A decrease in accounts payable

The section for cash flows from operating activities in the statement of cash flows primarily reflects the cash generated or used by the core business operations over a specific period. This includes cash receipts from customers and cash payments to suppliers and employees. A decrease in accounts payable fits into this category because it indicates that a company has paid off some of its outstanding obligations to suppliers. When accounts payable decreases, it typically means cash was used to settle these liabilities, thus reflecting a cash outflow within the operating activities section. This activity directly relates to day-to-day business operations, highlighting how cash is managed in relation to the company’s routine expenditures. Other choices, such as dividends paid, issuance of common stock, and purchasing a building, fall into different sections of the cash flow statement, namely financing or investing activities, rather than operations. These transactions do not directly affect the operational flow of cash, thereby distinguishing them from typical operating cash inflows and outflows.