Question

Which of the following is considered a 'Financing Activity' in a Cash Flow Statement?

• A. Purchase of machinery
• B. Payment of dividend
• C. Sale of investment
• D. Cash received from debtors

Hint:

Remember:
• Operating Activities = Day-to-day business operations.
• Investing Activities = Purchase or sale of fixed assets and investments.
• Financing Activities = Share capital, debentures, loans and dividend related transactions.

Answer 1

The Correct Option is B

Concept: According to Accounting Standard (AS-3), cash flows are classified into three categories:
• Operating Activities
• Investing Activities
• Financing Activities Operating Activities relate to the principal revenue-generating activities of the business. Investing Activities relate to acquisition and disposal of long-term assets and investments. Financing Activities relate to changes in owner's funds and long-term borrowings.

Step 1: Understand Financing Activities.
Financing activities include transactions that affect:
• Share Capital
• Debentures
• Long-term Loans
• Dividend Payments These activities determine the capital structure of the business.

Step 2: Examine Option (A).
Purchase of machinery involves acquisition of a fixed asset. Therefore it is an Investing Activity. Hence Option (A) is incorrect.

Step 3: Examine Option (B).
Payment of dividend represents distribution of profits to shareholders. It affects shareholders' funds and is treated as a Financing Activity. Therefore Option (B) is correct.

Step 4: Examine Option (C).
Sale of investment involves disposal of investments. This is classified as an Investing Activity. Hence Option (C) is incorrect.

Step 5: Examine Option (D).
Cash received from debtors arises from normal trading operations. Therefore it is an Operating Activity. Hence Option (D) is incorrect.

Step 6: Choose the correct answer.
Among all the options, only payment of dividend belongs to Financing Activities. Therefore, \[ \boxed{\text{Payment of dividend}} \] is the correct answer. \[ \boxed{(B)} \]