How should cash flow item be classified: cash used to repay principal amount of loan?

How should cash flow item be classified: cash used to repay principal amount of loan?

• A. Noncash investing/financing activity
• B. Investing activity
• C. Financing activity
• D. Operating activity

Answer: (C)

The cash flow item represents a financing activity. Cash used to repay the principal amount of a loan affects the company’s debt and liabilities, which is the kind of change financing activities track. Financing activities include transactions with lenders and owners that alter the capital structure, such as issuing debt or repaying debt, issuing stock, or paying dividends. It is not an operating activity, which reflects the day-to-day core business cash flows, nor an investing activity, which covers purchases and sales of long-term assets. It isn’t noncash, since there is an actual cash outflow involved.

The cash flow item represents a financing activity. Cash used to repay the principal amount of a loan affects the company’s debt and liabilities, which is the kind of change financing activities track. Financing activities include transactions with lenders and owners that alter the capital structure, such as issuing debt or repaying debt, issuing stock, or paying dividends. It is not an operating activity, which reflects the day-to-day core business cash flows, nor an investing activity, which covers purchases and sales of long-term assets. It isn’t noncash, since there is an actual cash outflow involved.