A. In this question we need to determine which of the activities are investing and which are financing. There are two investing activities: the payment for the purchase of machinery and the proceeds from the sale of the plant building. These two net together to a cash outflow of $700,000. There were also two financing activities: the proceeds from the issuance of preferred stock and the dividends paid on the preferred stock. These net to $3,600,000.
B. This answer incorrectly includes the stock dividend as a financing activity. A stock dividend is a distribution of additional shares of stock to existing shareholders. Since no cash is paid out, this is a noncash item. See the correct answer for a complete explanation.
C. This answer incorrectly includes the gain on the sale of the plant building as an investing activity. The gain on the sale is included in the proceeds from the sale of the building, so if we were to include it in cash flows from investing activities, we would be counting it twice. The amount of the gain is an adjustment in the operating activities section of the statement of cash flows. See the correct answer for a complete explanation.
D. This answer incorrectly includes the stock dividend as a financing activity. This is a noncash item. This answer also incorrectly includes the gain on the sale of the plant building as an investing activity. This is an adjustment in the operating activities section. See the correct answer for a complete explanation.
