How should cash paid for inventory be classified?

How should cash paid for inventory be classified?

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

Answer: (A)

Cash paid for inventory is classified as an operating activity because it ties directly to the business’s core operations—purchasing goods that will be sold to generate revenue. On the cash flow statement, cash outflows to suppliers for inventory appear under operating activities in both the direct and indirect methods, reflecting the ongoing costs of running the business. It isn’t a financing activity, which would involve obtaining or paying back capital, nor an investing activity, which covers buying or selling long-term assets. It also isn’t a noncash investing/financing activity, since cash is actually paid.

Cash paid for inventory is classified as an operating activity because it ties directly to the business’s core operations—purchasing goods that will be sold to generate revenue. On the cash flow statement, cash outflows to suppliers for inventory appear under operating activities in both the direct and indirect methods, reflecting the ongoing costs of running the business. It isn’t a financing activity, which would involve obtaining or paying back capital, nor an investing activity, which covers buying or selling long-term assets. It also isn’t a noncash investing/financing activity, since cash is actually paid.