On July 1, 2006, Dewey Co. signed a twenty-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 2006 statement of cash flows?

  1. An inflow equal to the present value of future lease payments at July 1, 2006, less 2006 principal and interest payments.
  2. An outflow equal to the 2006 principal and interest payments on the lease.
  3. An outflow equal to the 2006 principal payments only.
  4. The lease payments should not be reported in the financing activities section.