Examining a Company’s Inventory Disc ...
Financial statement analyses that fail to consider the impact of differences in methodologies... Read More
When reporting on a company’s financial position and performance, it is very important to appropriately classify various business activities of the company. Understanding how this classification is done lays the foundation for understanding financial reporting mechanics. Indeed, this helps in the identification of the areas in which a company is doing well.
For financial reporting purposes, a company’s business activities can be classified into three groups: operating, investing, and financing activities.
Of the three types of activities, analysts prefer to have most of a company’s profits and cash flow derived from its operating activities.
Question
Which of the following activities would be considered an investing activity?
A. The sale of surplus equipment
B. The issuance of bonds
C. The sale of products
Solution
The correct answer is A.
The sale of surplus equipment would be considered an investing activity. On the other hand, the issuance of bonds and sale of products would be considered financing and operating activities respectively.
Reading 22 LOS 22a:
Describe how business activities are classified for financial reporting purposes