The cash flow from_____ generally includes transactions involving the acquisition or disposal of non-current assets and funds including advances that are not described as cash.
A. Financing activities
B. Operating activities
C. None of the options provided.
D. Investing activities
The correct answer and explanation is :
The correct answer is D. Investing activities.
Explanation:
Cash flows from investing activities refer to transactions involving the acquisition and disposal of long-term assets (also known as non-current assets) and other investments. These activities typically involve buying or selling property, equipment, intangible assets (like patents or trademarks), and investments in securities of other companies (like shares or bonds). Cash flows from investing activities also include loans made to others (advances) or repayments received from loans provided to other entities, if these loans are not considered part of regular operating activities.
Examples of investing activities include:
- Purchase of property, plant, and equipment (PPE): When a company buys or sells physical assets like machinery, land, or buildings, the cash flow from these transactions is classified under investing activities.
- Sale of investments: When a company sells stocks, bonds, or other securities, the proceeds from the sale are considered cash inflows from investing activities.
- Acquisition or disposal of business operations: If a company buys or sells another company, it is classified as an investing activity because the company is acquiring or disposing of assets on a larger scale.
- Loans to others: If a company provides a loan to another party, the disbursement of cash is an outflow from investing activities. When the loan is repaid, it generates an inflow.
In contrast, financing activities deal with transactions related to obtaining or repaying capital (such as issuing stock, borrowing, or repaying debts), while operating activities cover the core business activities that produce revenue and incur expenses (such as sales and inventory purchases).
Investing activities focus on the use and acquisition of resources that will affect the company’s financial position and future earnings potential. These activities are generally less frequent than operating or financing activities, but they provide valuable insights into the company’s long-term strategic decisions.
Here is a flowchart that visually represents the three main categories of cash flow in a company’s financial statement: Operating Activities, Investing Activities, and Financing Activities.