Question

1. J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

a. A cash outflow from operating activities

b. A cash outflow from investing activities

c. A cash outflow from financing activities

d. No cash outflow

2. Bishop Company is the lessee in an operating lease. Bishop will report straight-line lease expense if it uses:

a. IFRS

b. U.S. GAAP

c Either U.S. GAAP or IFRS

d. Neither U.S. GAAP nor IFRS

Answer 1

1) Option b is Correct

Explanation:-

To understand this, let's first know that there are three types of activities while preparing a cash flow statement

a) Investing activities This includes the activities resulting in cash flow for purchase and sale of assets

b) Operating activities: This includes the activities resulting in cash flow from activities that form part of daily operation.

c) Financing activity: This includes the activities resulting in cash flow from activities where we are indulged in a finance arrangement or disbursement activity.

Now since entering into an operating lease means we are entering into an agreement where we are arranging finance for using an asset. This becomes our financing activity.

2) Option b is correct.

Explanation:- In making a distinction between an operating lease and a capital/finance lease, more judgment, less specificity is applied using IFRS.