Question 43

The purchase of $20,000 of inventory affects the statement of cash flows as an operating activity, representing a use of cash.

The acquisition of inventory is classified under operating activities in the statement of cash flows. This reflects the cash outflow associated with purchasing goods that will be sold in the normal course of business.

A) Financing activities (use of cash)

Financing activities pertain to transactions involving debt and equity funding, such as loans or stock issued. Since the purchase of inventory does not involve financing but rather relates to the direct operations of the business, this option is incorrect.

B) Investing activities (use of cash)

Investing activities involve the acquisition and disposal of long-term assets and investments. Inventory is considered a current asset and is tied to day-to-day operations, making this classification inaccurate for the purchase of inventory.

C) Operating activities (use of cash)

Operating activities include the cash effects of transactions that enter into the determination of net income, such as the purchase of inventory. This is the correct classification as the purchase represents a cash outflow necessary for the company’s core business operations.

D) Operating activities (source of cash)

While operating activities can involve cash inflows, the purchase of inventory is a cash outflow, not a source of cash. Therefore, this option is incorrect as it misrepresents the nature of the cash flow associated with inventory purchases.

Conclusion

The purchase of inventory is correctly categorized as an operating activity that uses cash, as it directly relates to the company’s operations. Options A, B, and D fail to accurately reflect the nature of the cash flow transaction, while option C correctly identifies the purchase as an operating activity that represents a cash outflow.