Question

Calculate the resulting cash flow and state the nature of cash flow from the following information:,
Acquired machinery for ₹3,50,000 by issuing cheque.

• A. Investing activity and outflow ₹3,50,000
• B. Investing activity and inflow ₹3,50,000
• C. Investing activity and no flow
• D. Operating activity and outflow ₹3,50,000

Answer 1

The Correct Option is A

Cash Flow Classification: Purchase of Machinery 

When a company acquires machinery, this transaction is classified as an investing activity in the Statement of Cash Flows. Investing activities involve the purchase and sale of long-term assets that are expected to generate future income for the business.

Explanation

Cash flows related to the purchase or sale of long-term assets, such as machinery, land, buildings, or equipment, fall under the category of investing activities. These activities represent a company's investments in its future operations.

Cash Flow Impact

Since the machinery was purchased using a cheque (representing an outflow of funds from the business), this transaction results in a cash outflow. This outflow is recorded in the investing section of the Statement of Cash Flows.

Entry in the Statement of Cash Flows

The correct entry for this transaction would be:

Cash Outflow from Investing Activities = ₹ 3,50,000

Summary

Therefore, the nature of the cash flow is an investing activity with an outflow of ₹ 3,50,000.