Earlier this year, Barracuda Company issued 5,000 employee stock options. Recently, 2,000 options were exercised at a price of $10 per share. To avoid dilution, Barracuda purchased 2,000 shares at an average price of $12 per share. Barracuda reported both transactions as financing activities in its cash flow statement. For analytical purposes, what adjustment is necessary to better reflect the substance of the stock repurchase?

 

Operating cash flow Financing cash flow

 

A. Decrease $4,000 No adjustment

 

B. No adjustment  Increase $4,000

 

C. Decrease $4,000 Increase $4,000

 

solution：c

 

Barracuda reported a $4,000 net outflow from financing activities [2,000 options* ($12 average market price-$10 exercise price)]. However, since the options are a form of compensation, the $4,000 outflow should be reclassified as an operating activity for analytical purposes. This is accomplished by increasing financing cash flow $4,000 and decreasing operating cash flow $4,000.