Question

Which of the following is a financing activity for the purpose of preparing a cash flow statement ?

• A. Cash purchases
• B. Receipt of rent
• C. Interest paid on long-term borrowings
• D. Income tax paid

Hint:

Interest paid on borrowings is a financing outflow.

Answer 1

The Correct Option is C

Step 1: Understand the question:
We must pick the item that is a financing activity in a Cash Flow Statement.

Step 2: Recall the three types of activities:
Operating: main revenue-earning activities of the business.
Investing: buying and selling long-term assets and other investments.
Financing: changes in the size and make-up of owners capital and borrowings, such as issue of shares, debentures, loans, and payment of interest and dividend on them.

Step 3: Classify each option:
(A) Cash purchases are payments for goods and relate to the main trading activity. They are operating.
(B) Receipt of rent is income earned on property or assets. It is not a way of raising or repaying capital, so it is not financing.
(C) Interest paid on long-term borrowings is the cost of borrowed funds. It is financing.
(D) Income tax paid is shown separately and is classified under operating activities.

Step 4: Pick the answer:
Only (C) is a financing activity. The marking scheme gives (C).

Final Answer:
Interest paid on long-term borrowings. Option (C).