In preparing a company's statement of cash flows, which of the following activities is classified as an investing activity?

• A. Purchasing equipment for cash
• B. Issuing common stock
• C. Paying salaries to employees
• D. Paying dividends to shareholders

Answer: (A)

Verified step by step guidance

1. Understand the classification of cash flow activities: Cash flows are categorized into operating, investing, and financing activities. Investing activities generally involve transactions related to the acquisition or disposal of long-term assets and investments.
2. Review the definition of investing activities: These include cash transactions for purchasing or selling property, plant, equipment, or investments. The focus is on activities that affect the company's long-term resources.
3. Analyze the options provided: Purchasing equipment for cash involves acquiring a long-term asset, which is classified as an investing activity. Issuing common stock, paying salaries, and paying dividends are not related to the acquisition or disposal of long-term assets.
4. Classify the other options: Issuing common stock is a financing activity because it involves raising capital. Paying salaries is an operating activity as it relates to day-to-day business operations. Paying dividends is also a financing activity as it involves returning profits to shareholders.
5. Conclude the correct classification: Purchasing equipment for cash is the activity that fits the definition of an investing activity, as it involves the acquisition of a long-term asset.