In accounting, financial activities are classified into three main categories: operating, investing, and financing activities. When assessing the cash flow statement, it's essential to correctly categorize transactions under these activities.
An investing activity involves transactions related to the acquisition and disposal of long-term assets and other investments not included in cash equivalents. This typically includes the sale of investments, purchase of fixed assets, and receipt of dividends.
Dividends received are considered part of investing activities because they represent a return on investment from financial assets. Therefore, when preparing a cash flow statement, dividends received are recorded under the investing activities section.
Given the options, the correct classification of dividend received is:
Operating activity
Financing activity
Investing activity
Cash and cash equivalents
The correct answer is Investing activity.
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Approach Solution -2
According to the cash flow statement format, dividend received is classified under the investing activity. This is because dividends received are usually from the investment made in shares or other securities, and these are considered returns on such investments.
If a company receives dividends from investments, the receipt is considered part of the investing activity, not operating or financing activities.
Operating activities would involve cash flows from the company's core business operations, while financing activities involve cash flows related to the company's capital structure (like borrowing or issuing equity).
Therefore, the correct classification is: (3) Investing activity
