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The cash flow statement gives information on a company’s cash receipts and payments during a specified period of time. This information can help users of financial statements (creditors, investors, analysts, etc.) evaluate a company’s liquidity and solvency.
There are three components of the Cash Flow Statement:
Question 1
Which of the following would be classified as a cash flow from investing activity?
- Proceeds from the issuance of bonds.
- Proceeds from the sale of machinery.
- Cash received from the sale of inventory.
Solution
The correct answer is B.
Proceeds from the sale of machinery is an example of cash derived from an investing activity.
A is incorrect because proceeds from the issuance of bonds relate to a financing activity.
C is incorrect because the sale of inventory is an operating activity.
Question 2
How would you classify the cash flow related to paying for shipping expenses of product materials and a new production machine, respectively?
- Both are operating cash flows.
- Investing cash flow; and operating cash flow.
- Operating cash flow; and investing cash flow.
Solution
The correct answer is C.
The first cash outflow is an operating activity. This is because it is related to the production activities of the company. The second cash outflow is an investing activity since it is related to the acquisition of a long-term asset.