Accounting question? Multiple Choice check?

Question

cash flows from selling trading securities are reported in the statement of cash flows as part of:

operating activities
financing activities
investing activities
noncash activities
none of these

my answer: i cant find the answer in the chapter but i dont think its any of the first three... im leaning towards noncash activities

thanks.

Answer 1

Trading securites are marketable securities like stocks and shares in companies. These are investments in your balance sheet. When you sell them, the proceeds from the sales are cash flows generated from investing activities.

Answer 2

Usually, statement of cash flow is divided into three sections: operating, investing and financing activities. Since the operation is selling trading securities, it normally follows that it should be reflected in the "operating activity" section of the Statement of cash flows.

Answer 3

cash flow from selling trading securities are reported of cash flow as part of investing activities

Answer 4

Securities are classified as "Investments" in the Balance sheet of the Company.
Investing activities are "acquisition and disposal f long term assets and other INVESTMENTS not included in cash and cash equivalents"

Eg:
1. Disposal/Acquisition of Fixed assets
2. Acquisition/sale of investment, or share in Joint venture

Hence, it is clear that this will be shown under "Investing Activities"


WHY IT CANNOT BE SHOWN UNDER OTHER HEADS:

1. Financing Activities: Activities that result in changes in the size and the composition of owner's capital and borrowings of an enterprise.

Here, securities neither affect the capital nor the borrowings of the company. Hence cannot be classified under Financing activities.

2. Non-Cash Activities: These include transactions taht do not require cash or cash equivalents.

Eg:
a. Conversion of debt into equity
b. Acquiring an enterprise by issue of shares.

Trading of securities is clearly a cash flow, since it involves inflow/outflow of cash and cash equivalents. Hence cannot be shown under Non Cash flows


3. Operating Activity: These are activities that are derived from the principal revenue producing activities of an enterprise.
In the given case, since the nature of business of the company is not known, it is assumed that the company's primary business is not dealing in shares,


Hope your doubt is cleared. If you are still unclear, drop me a message.

Answer 5

hey there!!i guess,cash proceeds from the trading securities is reflected as other income.so i guess,it's reported in the cash flow statement as part of financing activities...=).