Question

While preparing the Cash Flow Statement, purchase of goodwill is treated as

• A. Operating activity
• B. Financing activity
• C. Investing activity
• D. Extraordinary item

Answer 1

The Correct Option is C

In accountancy, when preparing a Cash Flow Statement, different transactions are classified under operating, investing, or financing activities based on their nature. The Cash Flow Statement is a financial statement that provides aggregate data regarding all cash inflows and outflows a company receives. It's helpful in assessing the company's liquidity, financial flexibility, and overall financial health.  

An investing activity is concerned with transactions involving the acquisition or disposal of long-term assets. These actions generally involve investing cash to purchase or expand long-term assets that will benefit the entity in its operations over time.

The purchase of goodwill is considered an investing activity. Goodwill arises when a company acquires another company for more than the fair market value of its net identifiable assets at the time of acquisition. This excess amount is not an ordinary business expense or a short-term liability and thus is categorized under the investing activities section of the Cash Flow Statement.

Therefore, while preparing the Cash Flow Statement, the purchase of goodwill is treated as an investing activity.

Answer 2

In a Cash Flow Statement, the purchase of goodwill is classified under Investing activities. This is because the purchase of goodwill is a form of investment made by the company. It is an outflow of cash related to the acquisition of an intangible asset (goodwill).

• Operating activities include the cash flows from the core business operations, such as revenues and expenses.
• Financing activities involve the cash flows related to borrowing and repayment of debt, or issuance of equity.
• Investing activities refer to cash flows that result from the purchase and sale of physical and financial assets like property, equipment, and goodwill.

Since the purchase of goodwill falls under the category of acquiring an intangible asset, it is classified as an Investing activity.

Thus, the correct answer is: Investing activity