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Business Strategy and Accounting Basics

A semiconductor manufacturer bought new manufacturing equipment and paid for it in cash. In the cash flow statement, in which section is this payment reported?

  1. ACash flows from investing activities
  2. BCash flows from operating activities
  3. CCash flows from financing activities
Show answer and explanation

Answer: A. Cash flows from investing activities

The cash flow statement shows the increase or decrease in cash divided into three sections: operating, investing and financing activities. Payments for investments for the future, such as purchases of fixed assets like manufacturing equipment and buildings, belong to cash flows from investing activities. Cash received from sales and paid for purchases and wages in the core business belongs to operating activities, and borrowing, repayment, issuing shares and paying dividends belong to financing activities. The price of the equipment leaves as cash in the year of purchase, but in the income statement it is spread as an expense over the useful life through depreciation.

  • A. Correct. Payments to acquire fixed assets are reported in the investing activities section.
  • B. This section reports cash received from sales in the core business and payments for purchases, wages and so on.
  • C. This section reports raising and repaying funds, such as borrowing, repayment, issuing shares and paying dividends.
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