M Corp. recorded a finance lease in February of Year 1 using an annuity due present value table. The company's statement of cash flows for the year ending December 31, Year 1 using the direct method will report:
A) A cash inflow from investing activities.
B) A cash outflow from financing activities.
C) A cash outflow from investing activities.
D) A cash inflow from operating activities.

Question

Quizplus · Accepted Answer

The company would report the the right-of-use asset and the lease liability as a significant noncash investing and financing activity in the disclosure notes to the financial statements.
The cash lease payments are divided into the interest portion and the principal portion. The interest portion is reported as a cash outflow from operating activities if using the direct method, but since an annuity due table was used there was no interest in the first payment. The principal portion is reported as a cash outflow from financing activities.

M Corp Recorded a Finance Lease in February of Year 1