Question 67

Operating activities (use of cash)

The purchase of $20,000 of inventory is classified as a use of cash within the operating activities section of the statement of cash flows. This transaction represents an outflow of cash as the business acquires goods that will be sold to generate revenue.

A) Operating activities (use of cash)

This option is correct because purchasing inventory directly impacts the operating activities of a company. Since inventory is a current asset, the cash outflow associated with acquiring it is reported under operating activities, reflecting the cash used to support the core business operations.

B) Financing activities (use of cash)

This option is incorrect. Financing activities relate to transactions involving debt, equity, and dividends, not operational purchases like inventory. Therefore, this does not pertain to the cash flow impact of acquiring inventory.

C) Operating activities (source of cash)

This option is incorrect. While operating activities can involve sources of cash, purchasing inventory constitutes a cash outflow, not a source. Therefore, this choice misrepresents the effect of the transaction on cash flow.

D) Investing activities (use of cash)

This option is also incorrect. Investing activities involve transactions related to the acquisition or disposal of long-term assets. Since inventory is classified as a current asset and relates to regular business operations, it does not fall under investing activities.

Conclusion

The purchase of inventory clearly represents a use of cash within operating activities, which is essential for understanding cash flow dynamics in business operations. All other options inaccurately categorize the nature of this transaction, thereby failing to reflect its impact on the statement of cash flows correctly.