Financing activities involve:
- lending money to other entities and collecting on those loans.
- cash receipts from sales of goods and services.
- acquiring and disposing of productive long-lived assets.
- long-term liability and owners’ equity items.
The correct answer and explanation is :
The correct answer is: long-term liability and owners’ equity items.
Explanation:
Financing activities are one of the three main categories in a company’s cash flow statement, the other two being operating and investing activities. Financing activities specifically deal with how a company funds its operations and growth, focusing on cash flows that involve long-term debt and equity. These activities reflect the movement of cash between the company and its owners, investors, or creditors.
- Long-term liabilities: Financing activities include obtaining or repaying capital from lenders through issuing or repaying long-term debt. This includes actions like issuing bonds or taking out loans and then repaying those debts over time. The cash inflow or outflow related to these activities is recorded as part of financing activities on the cash flow statement.
- Owners’ equity: Another important element in financing activities is the issuance or repurchase of stock. If a company issues new shares, it receives cash, which represents an inflow. Conversely, repurchasing or buying back its own shares leads to a cash outflow. Additionally, dividends paid to shareholders are also considered financing activities because they represent a distribution of profits to the company’s owners.
In contrast, the other options provided fall into different categories of cash flow:
- Lending money and collecting on loans: These transactions are considered investing activities, not financing. Lending money to others is an investment, and collecting the repayments is a return on that investment.
- Cash receipts from sales of goods and services: These are operating activities, which are related to the core business of the company, such as selling products or services.
- Acquiring and disposing of productive long-lived assets: These are also investing activities, as they involve acquiring physical assets like property, equipment, or machinery, or selling them.
In summary, financing activities specifically involve long-term liabilities and owners’ equity items, such as raising capital through loans or equity issuance and managing those liabilities and equity shares.
Here is an infographic illustrating financing activities in a company’s cash flow statement. It includes the key elements such as long-term liabilities, owners’ equity, and capital inflows and outflows. This should help you better visualize how financing activities are categorized.