Under USGAAP, the Statement of Cash Flows Classifies Cash Expenditures for for Interest

question 5

Multiple Choice

Under U.S.GAAP, the statement of cash flows classifies cash expenditures for interest on debt as a(n) _____ activity and classifies cash expenditures for dividends to shareholders as a(n) _____ activity.

• A)operating; operating
• B)operating: investing
• C)operating; financing
• D)financing; operating
• E)financing; financing

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Definitions:

Interest Tax Shield

The decrease in income taxes that occurs by subtracting a permitted deduction, like debt interest, from taxable income.

Levered Firms

Companies that employ debt (loans or bonds) in their capital structure alongside equity (stocks).

Unlevered Firms

Companies that operate without using debt or borrowed capital in their capital structures.

Financial Distress Cost

Expenses associated with a company struggling financially, including legal fees, restructuring costs, and impaired ability to conduct business.