Background:

Classifying financial activities into different categories is essential for understanding a company's cash flow and financial health. Activities are generally grouped into four main categories: Operating Activities, Investing Activities, Financing Activities, and Cash Equivalents.

Operating Activities: These include the day-to-day business activities, such as revenue and expense transactions.

Investing Activities: This category involves transactions related to the acquisition and disposal of long-term assets and other investments.

Financing Activities: Financing activities cover transactions with the company's owners and creditors, including borrowing money and repaying debts.

Cash Equivalents: These are short-term, highly liquid investments easily convertible to known amounts of cash and with original maturities of three months or less.

Classification of Activities:

(1) Cash receipts from Trade Receivables:

Classification: Operating Activities

Explanation: Cash receipts from trade receivables are part of the normal operating cycle and fall under operating activities as they represent cash generated from the core business operations.

(2) Highly liquid Marketable Securities without risk of change in value:

Classification: Cash Equivalents

Explanation: Highly liquid marketable securities with no risk of value change meet the criteria for cash equivalents. They are short-term, easily convertible to cash, and have minimal risk.

(3) Purchase of Investment:

Classification: Investing Activities

Explanation: Purchases of investments involve the acquisition of long-term assets and are therefore classified as investing activities.

(4) Proceeds from long-term borrowings:

Classification: Financing Activities

Explanation: Proceeds from long-term borrowings represent cash inflows related to financing activities, specifically borrowing from creditors.

(5) Wages and Salaries paid:

Classification: Operating Activities

Explanation: Payments of wages and salaries are part of the regular operating expenses and are classified under operating activities.

(6) Bank overdraft:

Classification: Financing Activities

Explanation: A bank overdraft represents short-term borrowing, falling under financing activities as it involves liabilities and borrowings.

Objective Type Question:

Which category encompasses activities related to the acquisition and disposal of long-term assets and other investments?

A. Operating Activities B. Investing Activities C. Financing Activities D. Cash Equivalents