Question

Which of the following is not correct about the statement of cash flows? A) Paying dividends to investors creates a cash outflow from financing activities. B) A purchase of equipment is classified as a cash outflow from investing activities.

Answer 1

Answer:

The statement that is not correct is:

• B) A purchase of equipment is classified as a cash outflow from investing activitites.

Explanation:

A) Paying dividends to investors creates a cash outflow from financing activities.

This is correct.

The financing cash flow or cash flow generated by financing activities is the cash flow that involves transactions with the banks (only the long term debt) or stake holders: financing debt, equity, and dividend.

Issuing equity of debt is a cash inflow: increases the cash of the company.

Paying dividends, such as repurchasing debt or equity are cash outlfow: decreases the cash of the company.

B) A purchase of equipment is classified as a cash outflow from investing activities.

This is not correct.

The operating cash flow is the cash that involves the operations of the company: sales (revenue), trade receivables, operating investement in building and equipments used for the operation, purchases from suppliers (inventory).

When you purchase an equipment it diminishes the cash or impact an operating account; thus, a purchase of equipment is classified as a cash ouflow from operating activities, not from investing activities.