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

To determine the nature of cash flow from acquiring machinery, we need to analyze it in terms of cash flow activities. In accounting, there are three main types of cash flow activities: operating, investing, and financing. 

1. Operating Activities: These involve the core business operations that generate revenue and expenses.
2. Investing Activities: These relate to the acquisition and disposal of long-term assets and investment in other entities.
3. Financing Activities: These include transactions involving equity and debt, such as issuing shares or borrowing money.

The transaction described is the acquisition of machinery for ₹3,50,000 by issuing a cheque. This acquisition of machinery is considered a long-term investment in capital assets and falls under investing activities.
Therefore, it is classified as:

• Type of Activity: Investing Activity
• Nature of Cash Flow: Outflow

The issuance of the cheque results in outflow because it decreases the company's cash reserves. Hence, the resulting cash flow is an investing activity and outflow of ₹3,50,000.

Answer 2

The acquisition of machinery is an Investing activity because it involves the purchase of a long-term asset. Since the machinery was acquired by issuing a cheque, it is an outflow of cash from the firm.

Thus, the correct answer is:

(1) Investing activity and outflow ₹ 3,50,000