Multiple Choice
In the context of investments in securities, which of the following best describes the cost incurred to prepare a machine or process for production?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
Which of the following is typically classified as an investing cash flow on the statement of cash flows?
A
Payment of salaries
B
Payment of dividends
C
Issuance of common stock
D
Purchase of equipment
Verified step by step guidance1
Understand the classification of cash flows: The statement of cash flows categorizes cash flows into three main activities: operating, investing, and financing. Investing cash flows typically involve transactions related to the acquisition or disposal of long-term assets and investments.
Analyze the options provided: Payment of salaries is an operating cash flow because it relates to day-to-day business operations. Payment of dividends is a financing cash flow because it involves returning capital to shareholders. Issuance of common stock is also a financing cash flow as it pertains to raising capital.
Focus on the correct answer: Purchase of equipment is classified as an investing cash flow because it involves acquiring a long-term asset that will be used in the business operations.
Relate the purchase of equipment to the definition of investing activities: Investing activities include cash flows from the purchase or sale of property, plant, and equipment, as well as other long-term investments. Equipment falls under this category.
Conclude the classification: The purchase of equipment is a typical example of an investing cash flow, as it represents an outflow of cash to acquire a long-term asset that contributes to the company's operations over time.
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