Question

1. Give two examples of cash receipts and two examples of cash payments that fit into each of the following classifications:

a. Operating activities.

b. Investing activities.

c. Financing activities.

2. Why are payments and receipts of interest classified as operating activities rather than as financing or investing activities?

Answer 1

Ans 1)
	a. Operating activities.
	Example of cash receipt= Receipt of cash from debtor, Receipt of interest on deposit
	Example of cash payment = Payment for purchase to creditor, payment for utility bill
	b. Investing activities.
	Example of cash receipt = cash proceed from sales of long term investment. Cash receipt on sale of land
	Example of cash payment = Cash paid for purchase of building, Cash paid for puchase of ABC Ltd.
	c. Financing activities.
	Example of cash receipt = Proceed from issue of debenture, Proceed from issue of share
	Example of cash payment = Payment of long term debt, Payment of dividend
Ans 2)	payments and receipts of interest classified as operating activities
	Principal amount borrowed is shown as financing activities but the interest paid on debt is shown
	as operating activity. Because this money is used for day to day business operation therefore
	interest paid on that amount is being treated as operating activity.