ACCA Financial Reporting (F7) Practice Exam

What are the three categories of activities in a statement of cash flows?

1. Operating, Equity, and Debt Activities

2. Operating, Investing, and Financing Activities

3. Revenue, Expense, and Profit Activities

4. Production, Sales, and Administrative Activities

The correct answer is: Operating, Investing, and Financing Activities

The correct answer identifies the three categories of activities in a statement of cash flows as operating, investing, and financing activities. This classification is fundamental to understanding how cash flows into and out of a business and provides valuable insights into the company’s financial health. Operating activities reflect the cash generated or used in the day-to-day operations of the business. This includes cash transactions related to revenue and expenses, such as cash received from customers and cash paid to suppliers. Investing activities show the cash flow associated with the acquisition and disposal of long-term assets and investments. This may include cash spent on purchasing property, plant, and equipment, as well as cash received from the sale of these assets. Financing activities represent cash flows related to the funding of the business. This includes transactions involving equity and debt, such as cash received from issuing shares, cash inflows from loans, and cash outflows for repaying debt or paying dividends to shareholders. Having a clear understanding of these categories enables stakeholders to evaluate how a company is generating cash, where it is being used, and how the company is financing its operations and growth.