Question 67

Operating activities (use of cash)

The purchase of $20,000 of inventory is classified under operating activities as it represents a cash outflow related to the day-to-day operations of a business. This transaction reflects the use of cash in the course of normal business activities.

A) Operating activities (use of cash)

This option is correct because purchasing inventory directly impacts the cash flow from operating activities. It shows that cash is being used to acquire goods that will be sold in the normal course of business, resulting in a decrease in cash flow.

B) Financing activities (use of cash)

This option is incorrect as financing activities pertain to cash flows that arise from transactions with the company's owners and creditors, such as issuing shares or borrowing money. The purchase of inventory does not fall under this category, as it does not involve raising capital or repaying debt.

C) Operating activities (source of cash)

This option is also incorrect because while operating activities can be a source of cash when inventory is sold, the purchase itself is a cash outflow, not a source. Therefore, categorizing it as a source misrepresents the nature of the transaction.

D) Investing activities (use of cash)

This option is incorrect because investing activities typically involve the acquisition or sale of long-term assets, such as property or equipment. Inventory purchases are considered part of operating activities since they are essential to the core operations of the business.

Conclusion

The correct classification of the purchase of $20,000 of inventory as an operating activity (use of cash) accurately reflects its impact on the statement of cash flows. All other options fail to recognize the nature of this transaction within the framework of cash flow classifications, leading to misunderstandings about how cash is utilized in business operations.