53. A company is looking for better ways to hold cash and decides to invest its excess cash in another company. How would this transaction be reported in the statement cash flows?
Answer: D
Cash outflows from investing activities
Investing excess cash in another company is recorded as a cash outflow from investing activities in the statement of cash flows. This is because the transaction involves the purchase of an investment, which is considered a long-term asset.
A) Cash outflows from financing activities
This option is incorrect as financing activities relate to transactions that affect the equity and debt of the company, such as issuing stocks or borrowing money. Investing in another company does not fall under financing activities.
B) Cash inflows from financing activities
This option is also incorrect since cash inflows from financing activities pertain to funds received by the company through borrowing or issuing equity. Investing in another company does not generate cash inflows but instead represents a cash outflow.
C) Cash inflows from investing activities
This option is incorrect because cash inflows from investing activities would represent cash received from the sale of investments or assets. Since the transaction in question involves spending cash to acquire an investment, it does not result in cash inflows.
D) Cash outflows from investing activities
This option is correct as it accurately categorizes the transaction of investing excess cash in another company. Such investments are considered cash outflows from investing activities, reflecting the purchase of a long-term asset.
Conclusion
The correct answer is D, as investing in another company clearly represents a cash outflow related to acquiring an asset. All other options are incorrect because they misclassify the nature of the transaction, which involves spending cash rather than receiving it. Thus, the cash flow statement correctly categorizes this investment as an outflow from investing activities.