How should utility bills be classified?

How should utility bills be classified?

• A. Noncash investing/financing activity
• B. Financing activity
• C. Investing activity
• D. Operating activity

Answer: (D)

Operating activities cover the cash effects of the business’s day-to-day operations. Paying utility bills is a normal operating expense needed to run the business, so the cash paid for utilities is reported as an operating activity on the cash flow statement. It isn’t related to obtaining or repaying borrowed funds or issuing stock (financing activities), nor to buying or selling long-term assets (investing activities). In the indirect method, this cash outflow shows up through the impact on net income and changes in working capital, rather than as a financing or investing item.

Operating activities cover the cash effects of the business’s day-to-day operations. Paying utility bills is a normal operating expense needed to run the business, so the cash paid for utilities is reported as an operating activity on the cash flow statement. It isn’t related to obtaining or repaying borrowed funds or issuing stock (financing activities), nor to buying or selling long-term assets (investing activities). In the indirect method, this cash outflow shows up through the impact on net income and changes in working capital, rather than as a financing or investing item.