When do the effects of product warranties appear on the statement of cash flows?
A)When the sale of merchandise is made.
B)When the warranty obligation is recognized.
C)When there is a settlement of a warranty claim made by a customer.
D)None of these answer choices are correct.

Question

Quizplus · Accepted Answer

The effects of product warranties appear on the statement of cash flows when there is a settlement of a warranty claim made by a customer. This is because a warranty claim settlement involves an outflow of cash from the company to the customer to cover the costs of repairing or replacing the faulty product. This outflow of cash is reflected in the operating activities section of the statement of cash flows under the category of "cash paid for warranties." The recognition of the warranty obligation and the sale of merchandise do not directly impact the statement of cash flows.

When Do the Effects of Product Warranties Appear on the Statement