Mend Co. purchased a three-month U.S. Treasury bill. Mend's policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. How should this purchase be reported in Mend's statement of cash flows?
a. As an outflow from financing activities.
b. Not reported.
c. As an outflow from operating activities.
d. As an outflow from investing activities.
Explanation
Choice "b" is correct. The U.S. Treasury bill is considered to be a cash equivalent item so purchasing the T-bill merely changes the form of cash held, it does not change the cash position of the entity. Thus, the purchase is not reported on the statement of cash flows.
Choice "c" is incorrect. Changes between cash and cash equivalent items do not affect the cash position of the entity and are not reported as an outflow from operating activities on the statement of cash flows.
Choice "d" is incorrect. Changes between cash and cash equivalent items do not affect the cash position of the entity and are not reported as an outflow from investing activities on the statement of cash flows. However, purchase of other forms of debt instruments is an investing activity.
Choice "a" is incorrect. Changes between cash and cash equivalent items do not affect the cash position of the entity and are not reported as an outflow from financing activities on the statement of cash flows.
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